^ 


^AS.E.UAURlATe'^ 


385Wash'nSt.Bosto 


AMERICAN   AND   FOREIGN 
INVESTMENT   BONDS 


AMERICAN  AND  FOREIGN 
INVESTMENT  BONDS 


BY 

WILLIAM   L.   RAYMOND 


^p.ioecs\ieVit^ 


BOSTON  AND  NEW  YORK 
HOUGHTON  MIFFLIN   COMPANY 

1916 


COPYRIGHT,    1916,    BY   WILLIAM   L.    RAYMOND 
ALL   RIGHTS   RESERVED 


Published  April  iqib 


f2 


o 


1 


W6- 
f^Z  I  a. 


PREFACE 

This  book  has  been  put  together  from  talks  given  to  the  writer's 
salesmen.  The  aim  has  been  to  discuss  cleariy  and  simply  the 
leading  classes  of  investment  bonds. 

In  trying  to  carry  out  this  aim,  the  writer  has  confined  himself 
mostly  to  a  discussion  of  the  factors  entering  into  the  intrinsic 
value  of  such  securities.  The  material  available  is  vast,  compli- 
cated, and  always  changing.  At  the  same  time  the  broad  prin- 
ciples which  govern  the  safety  of  investment  bonds  are  simple  and, 
like  the  laws  of  nature,  forever  the  same. 

From  the  point  of  view  of  the  intrinsic  value  of  American  se- 
curities, the  Great  War  in  Europe  has  brought  into  high  relief  the 
resources  and  development  of  the  United  States.  With  the  open- 
ing of  the  Panama  Canal,  the  creation  of  an  adequate  merchant 
marine,  and  the  estabHshment  of  a  new  banking  system,  this 
country  should  be  placed  in  a  position  with  relation  to  the  business 
and  finance  of  the  world  which  it  never  has  held  before.  Further- 
more, the  United  States  may  become  the  market  for  a  consider- 
able amount  of  foreign  government  securities.  It  is  to-day,  of 
course,  the  principal  market  for  the  bonds  of  its  own  States,  mu- 
nicipalities, and  corporations. 
It  is  hoped  that  this  book  may  suggest  some  points  of  view  of 

o     interest  even  to  seasoned  investors. 

The  writer  wishes  to  thank  Mr.  Francis  G.  Goodale,  who  has 
done  a  large  part  of  the  legal  work — especially  in  Chapters  III, 
IV,  V,  and  VI.  The  writer  wishes  also  to  thank  friends  who  have 

^      read  the  manuscript. 

^  W.  L.  R. 

~"  October  23,  1915. 


458122 


CONTENTS 

INTRODUCTION  j^ 

I.    THE   FIELD   OF  INVESTMENT  j- 

II.   UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS      5 

III.  STATE  BONDS  g. 

IV.  COUNTY,    MUNICIPAL,   AND   DISTRICT  BONDS  140 
V.   STEAM-RAILROAD   BONDS                                                           1 62 

VL    PUBLIC-SERVICE  CORPORATION   BONDS  198 

VII.    INDUSTRIAL  BONDS 
CONCLUSION 
APPENDIX 
INDEX 


251 

295 
297 

311 


INTRODUCTION 

Investment  in  bonds  is  a  comparatively  modem  development. 
It  has  arisen  out  of  the  needs  of  governments  and  corporations  to 
finance  themselves  on  a  scale  larger  than  that  pos-   investment  in 
sible  from  annual  taxes  or  annual  earnings.  Its  devel-   bonds  is  a 

comparatively 

opment  has  been  connected  with  the  development   modem 

.  ,        ,  .  development 

of  bankmg. 

The  banking  business,  in  some  form  or  other,  has  been  carried 
on  practically  continuously  from  a  period  six  hundred  years  be- 
fore the  Christian  era  in  Babylon  ^  down  through   The  banking 
the  periods  of  Athenian  ^  and  Roman  ^  domination   beerfcan-ied  on 
of  the  civilized  world,  and  again  through  the  periods    ^  ^odSn^* 
of  the  rise  and  development  of  the   Venetian  and   times 
Florentine  States,  and  the  growth  and  commercial  expansion  of 
such  countries  as  modern  England,  France,  Germany,  and  the 
United  States. 

As  early  as  the  twelfth  century,  the  Republic  of  Venice  obtained 
forced  loans  from  its  people.  The  State  paid  interest  on  these 
loans,  but  deferred  payment  of  the  principal  to  a  Early  govem- 
time  "when  the  situation  of  affairs  should  permit  me^t  loans 
it."  ^  Later  Venice  obtained  from  its  citizens  loans  secured  by  the 
revenue  from  salt  and  by  the  income  of  the  treasury  for  a  certain 
number  of  years. ^  Florence  borrowed  of  its  bankers  and  pledged 
as  security  certain  taxes  and  other  revenues.^ 

Government  borrowing,  by  the  issue  of  bonds  or  other  evi- 
dences of  debt,  assumed  a  more  or  less  regular  form    Government 

T-<  -1  •  r-r-1  •T'7/  \«        borrowing  in 

m  1*  ranee  m  the  time  of  Francis  I^  (1515-47),  in   France,  Eng- 
England  with  the  Revolution  of  1688  and  the  Wars   United° states 

*  The  Bankers^  Magazine,  London,  August,  1877,  pp.  720-21. 

^  Macleod,  The  Theory  and  Practice  of  Battking  (London,  1892),  vol.  i,  p.  171. 
'  Ibid.,  p.  161. 

*  Daru,  Histoire  de  la  Republique  de  Venise  (Paris,  1853),  tome  i,  pp.  146-47. 
^  Ibid.,  p.  147. 

^  Perrens,  Histoire  de  Florence  (Paris,  1877),  tome  rn,  pp.  261-62. 

"  Viihrer,  Histoire  de  la  Dette  Publique  en  France  (Paris,  1886),  tome  i,  p.  2. 


X  INTRODUCTION 

of  William  III,^  and  in  what  is  now  the  United  States  during  the 
Revolutionary  War.^ 

In  the  early  part  of  the  nineteenth  century,  we  find  in  France 
Early  local  Small  amounts  of  local  loans  or  debts  of  the  corn- 

loans  munes  ^  and  in  the  United  States  borrowing  on  a 

considerable  scale  by  our  States  and  to  a  less  extent  by  our  cities. 

In  the  United  States,  the  bond  business  before  and  during  the 
Civil  War  was  concerned  principally  with  United  States  govem- 
Thebond  Hient,  State,  and  to  a  less  extent  municipal  bonds. 

business  in  the    After   that   period,   bankers  became  interested  in 

United  States  .  ii.it 

nnancmg  the  buildmg  of  many  of  our  railroads  and 
during  the  past  thirty  years  in  furnishing  money  for  the  building 
and  development  of  gas,  street-railway,  electric-light,  and  tele- 
This  book  wiu  phone  properties.  The  financing  of  industrial  con- 
paiij'ofTn-  cerns  through  the  issue  of  bonds  is  a  development 
of'ieading"^^  principally  of  the  past  twelve  or  fifteen  years, 
classes  of  bonds  Jn  the  following  pagcs,  we  will  concern  ourselves 
less  with  the  history  of  borrowing  than  with  the  principles  govern- 
ing at  present  the  intrinsic  values  of  leading  classes  of  bonds. 

'  Macleod,  vol.  i,  pp.  441-48. 

^  Tenth  Census,  vol.  vii,  pp.  299-301. 

^  Hirst,  The  Credit  of  Nations  (Washington,  1910),  p.  96. 


AMERICAN  AND  FOREIGN 
INVESTMENT   BONDS 


AMERICAN   AND    FOREIGN 
INVESTMENT   BONDS 

CHAPTER  I 

THE  FIELD   OF  INVESTMENT 

The  investment  of  funds  so  as  to  have  the  principal  safe  and  at  the 
same  time  obtain  a  reasonable  income  is  an  extremely  difiScult 
matter.  The  field  is  so  large,  the  possibiUties  of  mis-  ^^^  investment 
take  so  numerous,  that  more  than  ordinary  skill  and  of  funds  is 

difficult 

knowledge  are  required. 

As  a  general  rule,  funds  should  be  invested  when  received.    If 
investment  is  made  when  market  prices  are  low  as    puQ^j^  should 
well  as  when  they  are  high,  an  average  price  will  be   be  invested 
paid  and  none  of  the  funds  will  be  left  without  re- 
ceiving some  income. 

Funds  may  be  placed  in  any  one  or  more  of  the  following  prin- 
cipal channels  of  investment:  — • 

(i)  Real  estate  and  real-estate  mortgages;  neb'ofmvett- 

(2)  Bonds;  ment 

(3)  Stocks; 

(4)  Collateral  loans,  commercial  paper,  and  ordinary  notes  of 
firms  and  individuals. 

About  collateral  loans,  commercial  paper,  and  ordinary  notes, 
we  will  say  only  a  few  words.    This  class  of  paper   short-term 
belongs  not  so  much  to  the  subject  of  investment  as   p^p^"" 
to  the  subject  of  ordinary  banking  or  loaning  money  for  short 
periods. 

The  other  three   principal  kinds  of  investment — that  is,  in 
real  estate  and  real-estate  mortgages,  in  bonds  and   The  three 
in  stocks  — may  be  said  to  furnish  the  ordinary  Cm"'^onnvest-" 
field  for  investment.  "^^^^ 

The  principal  advantage  that  real  estate  has  over  other  mediums 


2  AlVIERICAN  AND  FOREIGN  INVESTMENT  BONDS 

of  investment  is  its  tangibility.  The  great  disadvantage  which 
.  ,     ^  .   real  estate  has  is  that  it  is  difficult  to  sell  quickly. 

Advantages  and  ,  .  ^  .        . 

disadvantages     Another  disadvantage  is  that  the  income  is  liable 

of  real  estate  ,      ,  •  i      ,    .  •  -i  i 

to  be  uncertam  and  at  times  may  cease  altogether. 

Real-estate  mortgages  are  somewhat  different.  These  run  or- 
dinarily from  one  to  five  years,  —  perhaps  most  commonly  three 
Real-estate  years,  —  are  tax  exempt  in  many  States,  and  are 
mortgages  written  usually  for  about  sixty  per  cent  of  the  as- 

sessed value  of  the  property.  Such  mortgages,  when  given  by 
responsible  persons  and  after  proper  examinations,  ought  to  be 
reasonably  safe  mediums  for  investment.  Even  with  mortgages 
that  are  finally  paid  off,  however,  the  payment  of  the  interest  often 
is  irregular. 

There  remain  to  be  spoken  of  in  this  very  general  survey  of  the 
Bonds  and  fi^ld  of  investment  only  bonds  and  stocks.   For  con- 

stocks  venience,  we  will  speak  of  stocks  first. 

In  a  general  way,  stocks  stand  for  the  ownership  of  the  business 
and  the  right  to  receive  the  net  profits,  whereas  real-estate  mort- 
Nature  of  g^gcs  or  bonds  stand  for  the  prior  claim  on  the  prop- 

^^°'^^  erty  and  the  right  to  obtain  a  stipulated  amount  in 

interest  before  anything  is  paid  in  dividends  to  stockholders. 
Stocks  always  are  junior  to  bonds  and  notes  of  the  same  corpora- 
tion. Often  they  represent  to  a  large  extent  merely  capitaHzation 
of  earning  capacity.  There  is  no  promise  to  pay  a  definite  sum  of 
money  and  no  promise,  as  a  rule,  even  to  pay  any  income.  The 
stocks  of  any  corporation  have,  in  this  respect,  merely  the  right  to 
participate  in  earnings  above  operating  expenses  and  fi^ed  charges, 
when,  as,  and  if  earned  by  the  corporation  and  ordered  distributed 
by  the  board  of  directors. 

Many  corporations  have  two  classes  of  stock,  preferred  and 
common.  Preferred  stock  usually  is  entitled  to  a  certain  dividend 
Classes  of  before  anything  is  paid  on  the  common.   Sometimes 

stocks  tiijs  dividend  is  cumulative  —  that  is,  unless  paid 

regularly,  it  becomes  an  accumulated  charge  against  earnings. 
Many  preferred  stocks  are  preferred  not  only  as  to  dividends,  but 
as  to  assets  in  case  of  liquidation. 
Investment  in  The  remaining  important  fonn  of  investment  — 

bonds  the  sub-        .  ,  i.i  i.  ri»ii 

ject  of  this  book  investment  in  bonds  —  is  the  subject  of  this  book. 


THE  FIELD  OF  INVESTMENT  3 

The  first  thing  to  notice  about  bonds  is  that  they  represent,  as 
a  rule,  a  promise  to  pay  a  definite  sum  of  money  at  Bonds  imply  a 
a  given  time,  with,  usually,  a  regular  rate  of  interest.   ^^^^^^  promise 

The  principal  large  classes  of  investment  bonds  are  as  follows:  — 

(i)  Government  bonds. 

(2)  State  bonds.  Principal  classes 
-   .                                    ...            1    1  •       •       1          1                            of  investment 

(3)  County,  municipal,  and  district  bonds.  bonds 

(4)  Steam-railroad  bonds. 

(5)  Public-service  corporation  bonds,  or  bonds  of  corporations 
supplying  water,  gas,  electric  light  and  power,  street-railway, 
or  telephone  service. 

(6)  Industrial  bonds  or  bonds  of  manufacturing  and  mercantile 
concerns.^ 

It  may  be  well  here  to  speak  of  what  may  be  called  the  frame- 
work of  bond  investment.  If  we  think  of  the  bonds  of  the  leading 
civilized  nations  of  the  world;  then  of  the  bonds  of  our   ^,    , 

o  If  IT  •   •  ^^^  frame- 

States  and  of  our  leading  cities;  then  of  the  bonds  of   work  of  bond 

the  principal  trunk-line  railroads  connecting  those  '°^^^  ^^^ 
cities;  and  then  of  the  bonds  of  the  street-railway,  gas,  electric- 
light  and  power,  and  telephone  companies  serving  those  cities;  and 
then,  if  we  add  to  those  securities  the  bonds  of  the  great  industrial 
concerns,  we  have  the  framework  around  which  is  built  practi- 
cally the  entire  structure  of  bond  investment. 

We  cannot  say  that  any  one  class  of  bonds  is  always  and  without 
exception  safer  than  another  class,  any  more  than  we  can  say  that 
bonds  are  always  safer  than  stocks  or  always  safer   one  class  of 
than  real  estate.  Each  individual  bond  issue  must  be   afwaysTafer 
judged  on  its  own  merits,  yet  with  due  reference  to   ^^^^  another 
the  whole  structure  of  investment,  just  as  each  case  in  common 

1  In  view  of  the  fact  that  we  do  not  discuss  in  this  book  the  methods  of  dealing  in 
or  marketing  bonds,  we  will  say  here  that  the  two  great  markets  in  the  United  States 
for  all  kinds  of  bonds  are  the  New  York  Stock  Exchange  and  private  bankers  or  bond 
dealers.  Of  the  two  markets,  the  latter  is  far  and  away  the  larger.  The  great  bulk  of  the 
state,  municipal,  and  public-service  corporation  bonds  is  marketed  by  private  bankers. 
Original  issues  of  steam-railroad  and  industrial  bonds  usually  are  sold  first  to  clients 
by  private  bankers.  The  New  York  Stock  Exchange  may  be  said  to  be  the  great 
secondary  market  for  railroad  bonds  and  such  other  bonds  as  are  listed  there.  All 
the  other  stock  exchanges  in  the  country,  including  the  Boston,  Philadelphia,  and 
Chicago  Exchanges,  deal  to  a  greater  or  less  degree  in  bonds. 


4  AIvIERICAN  AND  FOREIGN  INVESTMENT  BONDS 

law  must  be  judged  on  its  own  merits  taken  in  connection  with 

the  previously  existing  body  of  law.  ^ 

In  the  following  pages,  we  wiU  take  up  m  a  general 
S'oftSs^'"  way  the  features  bearing  on  the  safety  of  these  vari- 

kinds  of  bonds       ^^^  ^^^^  ^j  ^^^^^^ 


CHAPTER  II 

UNITED  STATES  AND  POREIGN  GOVERNMENT  BONDS 

Government  bonds  either  are  simply  promises  to  pay  or.  ac- 
knowledgments of  indebtedness,  or  else  are  promises   General  de- 
to  pay  and  have  some  special  security.  In  Europe,   government 
government  bonds  often  are  referred  to  as  "stocks."   ^^^^^ 

The  government  bonds  of  most  of  the  so-called  great  powers, 
notably  the  United  States,  Great  Britain,  France,  and  Germany, 
are  simply  promises  to  pay  or  acknowledgments  of  ^^  ,    ,  , 
indebtedness.    In  many  cases  these  obligations  have   United  states, 

_    . , .  ,  1      -I-.  1       /-TV  Great  Britain, 

no  matunty,  —  as  British  consols,  French  3%  rentes,  France,  and 
and  German  Imperial  3%  bonds,  —  although  often  ^™^°y 
reducible  by  purchase,  as  are  all  old  German  Imperial  bonds,  by 
drawings,  as  are  French  3%  redeemable  rentes,^  or  by  redemption 
at  the  option  of  the  Government,  as  are  British  consols  and  Ger- 
man Imperial  bonds. ^  Government  bonds  of  the  class  described 
above  are  payable,  as  a  rule,  out  of  the  ordinary  revenues  and 
resources  of  the  Government,  whether  such  revenues  are  derived 
from  customs  duties,  excise  taxes,  income  taxes,  or  from  any  other 
available  resources. 

In  the  cases  of  certain  nations  that  do  not  have  high  credit, 
there  are  often  special  provisions  to  secure  the  payment  of  interest 
and  principal  of  their  government  bonds:  for  instance,  in  the  case 
of  the  Japanese  Government  4!%  sterling  loan,  put  Government 
out  at  the  time  of  the  war  with  Russia,  the  bonds  are  EimJha^^' 
secured  by  a  charge  on  the  annual  net  revenues  of  special  security 
the  Imperial  Japanese  Government  Tobacco  Monopoly; '  in  the 
case  of  the  Argentine  Republic  Port  of  Buenos  Aires  5%  deben- 
tures, the  bonds,  besides  being  a  direct  obligation  of  the  Ar- 
gentine Government,  are  secured  by  a  charge  on  the  harbor 
works  and  their  revenues  and  on  other  property;  ^  in  the  case  of 

^  The  Stock  Exchange  Official  Intelligence  for  igi4  (London),  p.  109. 
,  *  Ibid.,  pp.  3  and  109.  *  Ibid.,  p.  113.  ■*  Ibid.,  p.  96.  ^ 


6  AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

the  Bulgarian  Government  6%  state  mortgage  loan  of  1892,  the 
bonds  are  secured  by  a  first  mortgage  on  certain  state  railways 
and  on  the  harbors  of  Varna  and  Burgas,  together  with  the  present 
and  future  revenues  and  dues  of  those  harbors;  ^  in  the  case  of  the 
Mexican  5%  external  consolidated  gold  loan  of  1899,  the  bonds 
are  secured  by  special  hypothecation  of  62%  of  the  import  and 
export  duties  of  the  United  States  of  Mexico;  -  in  the  case  of  the 
Greek  Government  4%  loan  of  1902,  the  bonds  are  secured  by  a 
prior  lien  on  the  surplus  receipts  from  certain  assigned  revenues,^ 
by  the  surtax  on  tobacco  deposited  at  the  National  Bank,  and  by 
a  first  lien  on  certain  railroad  property  and  the  share  in  its  net 
earnings  accruing  to  the  Government.^ 

Broadly  speaking,  however,  government  bonds  are  to  be  thought 
of  as  representing  simply  the  good  faith  and  ability  to  pay  of  the 
No  legal  rem-  govcmmcnts  or  nations  issuing  the  bonds.  There 
defaufun'g  *  is  no  known  method  of  collecting,  against  the  will 
nations  gf  the  nation  indebted,  a  government  bond  issue  or 

the  interest  on  it,  except  force.  In  the  words  of  Professor  Bas- 
table,  it  rests  with  the  Government  "  within  its  own  discretion  to 
say  whether  or  not  it  will  meet  its  obligations."  Again,  he  says, 
"An  Act  of  Parliament  repudiating  the  national  debt  would  be 
quite  as  valid  as  any  other  measure."^  Against  a  sovereign  state, 
the  only  remedy  is  what  has  been  called  "collection  by  warship." 

Furthermore,  a  nation  can  borrow  for  any  purpose  that  it 
sees  fit  —  from  a  strictly  productive  purpose,  like  construction 
^,  .  of  railways,  to  a  highly  unproductive  and  wasteful 

Nation  can  ''    \  i. 

borrow  for  purposc  such  as  war.   It  can  and  often  does  borrow 

any  purpose  Qy^^i  to  meet  deficiencies  in  the  revenue  in  times  of 
peace  —  in  other  words,  it  can  borrow  to  meet  running  expenses. 
Such  a  use  of  the  borrowing  power  is  far  from  desirable,  but  some- 
times it  is  necessary.  There  is  no  authority  that  can  place 
restrictions  on  the  purpose  of  borrowing  or  curb  in  any  way  a 
sovereign  state  or  nation. 

^  The  Stock  Exchange  Official  Intelligence  for  191 4  (London) ,  p.  100. 

2  Ihid.,  p.  114. 

'  Ibid.,  p.  109.  Revenues  from  the  monopolies  on  salt,  petroleum,  matches,  play- 
ing-cards, cigarette  paper,  and  Naxos  emery,  from  tobacco  dues,  from  certain  stamp 
dues,  and  from  import  duties  collected  by  the  custom-house  at  the  Piraeus. 

*  Ihid.,  p.  no.        "  C.  F.  Bastable,  Public  Finance  (2d  ed.,  London,  1895),  p.  611. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS      7 


PRICES 

OF  GOVERNMENT 

BONDS,  JANUARY,  1913 

Issue 

Price 

Yield 
about 
(per 

cent) 

United  States 
Panama,!  2%, 
due  June  i, 
1961 

102I  and  interest 

2.92 

This  issue  is  not  available  to  secure  circula- 
tion of  national  banks.  Exempt  from  all 
taxes  national,  state,  and  local. 

British  2^%, 
consols,  cash  2.. 

75A  flat 

3-33 

Redeemable  at  option  of  Parliament  on  and 
after  April  s,  1923,  at  par.  Interest  Jan- 
uary 5,  April  5,  July  5,  and  October  5. 

French  3%  per- 
petual rentes '. . 

88|  flat 

3-39 

Interest  January  i,  April  i,  July  i,  and 
October  i. 

Italian  3^%  rentes  * 

96  flat 

3.65 

Interest  January  i  and  July  i,  exempt  from 
all  Italian  taxes  present  and  future. 

German  Imperial 
3%' 

77?  flat 

391 

Redeemable  at  option  of  German  Empire, 
after  notice  to  be  fixed  by  law,  at  par. 
Interest  April  i  and  October  i. 

Austrian  gold  4% 
18755 

9i|  flat 

4-43 

Interest  April  i  and  October  i. 

Himgarian  4% 
gold  rentes °.... 

87  flat 

4.61 

Redeemable  at  option  of  the  Government  at 
any  time.  Interest  January  i  and  July  i . 
Principal  and  interest  exempt  from  all 
Hungarian  taxes. 

Russian  4%, 
Series  11 ' 

90|  flat 

4-45 

Redeemable  by  drawings  at  par  January  i 
and  July  i  for  repayment  April  i  and  Oc- 
tober I  within  81  years  from  1890.  In- 
terest January  i,  April  i,  July  i,  and  Oc- 
tober I.    Exempt  from  all  Russian  taxes. 

Russian  s%,  1906* 

104  flat 

4.84 

Redeemable  by  annual  drawings  at  par  on 
and  after  February  i,  1917,  for  repayment 
on  May  i  following.  Must  be  repaid  in 
full  by  May  i,  1956.  Until  May  i,  1916, 
loan  cannot  be  converted  or  called  for  re- 
payment. Interest  May  i  and  November 
I.    Exempt  from  all  Russian  taxes. 

Japanese  4% 
sterling,  1910,' 
due  June  i, 
1970 

82  flat 

4-95 

Redeemable  at  option  of  the  Government, 
on  six  months  notice,  on  or  after  June  i, 
1920,  at  par.  Interest  June  i  and  Decem- 
ber I.  Interest  exempt  from  Japanese 
Income  Tax. 

Japanese  4|% 
sterling,  1905  ^ 
(2d  Series),  due 
July  10,  1925.. . 

94§  flat 

S.36 

Redeemable  at  option  of  the  Government 
at  any  time,  on  six  months  notice,  at  par. 
Interest  January  10  and  July  10.  Inter- 
est exempt  from  Japanese  Income  Tax. 

>  See  United  States  Treasury  Department,  Circular  52,  July  1,  1912  (Washington,  1913),  p.  17. 

'  The  Stock  Exchange  Official  Intelligence  for  IQ14  (London),  p.  3.        3  Ibid.,  p.  109.      *  Ibid.,  p.  iia. 

*  Ibid.,  p.  97.      *  Ibid.,  p.  111.      1 1bid.,  p.  iiS.      »  Ibid.,  p.  iig.      ^  Ibid.,  p.  113. 


8  AIMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

In  view  of  this  fact  the  question  is,  What  is  the  real  security,  or 
what  are  the  factors  that  go  to  make  up  the  abiUty  and  willing- 
What  is  the        ncss  of  a  Government  to  pay  the  interest  and  prin- 

real  security?         ^jp^j  ^^  -^^  bonds? 

If  we  approach  this  question  first  from  the  point  of  view  of 
what  some  of  the  leading  government  securities  have  been  selling 
Credit  of  the  ^^^'  —  ^^  ^^*-*^  what  may  be  called  the  point  of  view 
leading  na-         of  the  Credit  of  the  leading  nations,  —  we  shall  be 

tions  as  shown  .  .  ,     °     ,  ' 

by  the  prices       able  to  dJscuss  it  more  intelligently.   The  table  on 

of  their  govern-  ^  ^^  •  i    .1 

ment  bonds  in  page  7  shows  the  priccs  and  the  approximate  net 
January,  1913  income  basis  ^  on  which  certain  leading  government 
bond  issues  sold  in  January,  1913.^  We  have  chosen  this  date  be- 
cause it  corresponds  most  closely  with  the  date  of  reliable  infor- 
mation available  in  regard  to  the  nations  issuing  the  bonds.  These 
prices,  as  compared  with  those  of  191 2,  evidently  show  to  a  con- 
siderable extent  the  effect  of  the  events  leading  up  to  the  Balkan 
Wars  and  of  the  outbreak  of  those  wars  in  the  preceding  autumn. 

The  income  basis  on  which  the  above  government  bonds  sell 
reflects  in  a  general  way  the  credit  of  the  nation  issuing  the  obli- 
gations. As  may  be  seen  from  the  table.  United  States  Govern- 
ment bonds  sell  to  yield  a  smaller  income,  or,  in  other  words,  sell 
at  a  higher  price  than  the  bonds  of  any  other  of  the  leading  civil- 
ized nations.  British  consols  rank  next,  then  French  rentes,  then 
Italian  rentes,  and  so  on  in  the  order  of  the  Hst.  What  are  the 
reasons  for  these  differences  in  price?  In  other  words,  why  is  the 
credit  of  the  United  States  or  of  Great  Britain,  for  instance,  higher 
than  that  of  Austria  or  Japan? 

Before  going  any  further  it  may  be  well  to  inquire  who  and 

,  what  are  the  people  responsible  for  these  obligations. 

people  WTiat  is  their  origin?   What  briefly  is  their  history? 

foSse  *         What  kind  of  people  are  they?   What  is  their  place 

obligations?  ^  ^^^  ^^j.j^P 

*  In  the  cases  of  issues  having  definite  maturities,  net  income  is  determined  by  use 
of  the  usual  bond  tables;  in  the  cases  of  issues  without  definite  maturity,  net  income 
is  determined  by  dividing  the  per-cent  interest  which  the  bonds  pay  by  the  per-cent 
selling  price.  Flat  quotations,  or  quotations  including  accrued  interest,  are  reduced, 
in  figuring  the  yield,  to  an  "and  interest"  basis.  Quotations  of  all  bonds  except 
United  States  Government  bonds  are  in  per-cent  sterling. 

^  Prices  of  January  3,  1913.  Price  of  United  States  bonds  from  Commercial  and 
Financial  Chronicle  (New  York),  vol.  96,  p.  50.  Prices  of  foreign  government  bonds 
from  the  Statist  (London),  vol.  75,  pp.  5  and  59. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS   9 

Some  of  the  nations  issuing  these  obligations  have  their  begin- 
nings in  a  remote  past.  All  are  peopled  to  a  greater  or  less  degree 
by  a  mixture  of  races,  and  all  have  occupied  terri-  Racial  origin 
tory  with  boundaries  intermittently  changing.  In  a  modlm^^^"^ 
general  way,  with  the  exception  of  Japan  and  to  a  ^^ations 
less  extent  of  Russia,  all  the  great  modern  nations  —  the  United 
States,  Great  Britain,  France,  Germany,  Austria-Hungary,  and 
Italy  —  come  from  a  mixture  in  varying  degrees  of  the  Germanic 
or  Baltic  tribes  which  overran  the  Roman  Empire  —  375  to  476 
A.D.  —  with  the  Latin  races  of  the  Empire.  The  Slavs  or  Wends, 
who  at  an  early  date  appeared  to  be  settled  northeast  of  the  Car- 
pathians in  the  basins  of  the  Vistula,  Pripet,  and  upper  Dniester, 
were  closely  related  in  stock  to  the  ancestors  of  the  Baltic  tribes, 
Prussians,  Lithuanians,  and  Letts.  The  Roman  historian  Pliny 
speaks  of  Slavs  along  the  Vistula  and  the  Venedic  Gulf  —  prob- 
ably the  Gulf  of  Danzig.  The  Goths  and  Huns  at  one  time  were 
the  conquerors  of  the  Slavs.  The  Eastern  Slavs  became  the  Rus- 
sian people.  They  attacked  the  Empire  on  the  lower  Danube 
and  reached  the  Don  and  the  Volga. ^  Later  there  took  place  an 
amalgamation  or  absorption  by  the  Slav  race  of  a  variety  of 
Ural-Altaic  stocks,  Turko-Tatars,  Turko-Mongols,  and  various 
Caucasian  races.^  The  origin  of  the  Japanese  is  uncertain.  The 
aborigines  were  called  Ainu  —  suggesting  a  close  affinity  with 
Europeans.  The  bulk  of  the  population  to-day,  however,  seems 
to  be  derived  from  a  mixture  of  the  Malay,  Mongolian,  and  Man- 
chu-Korean  types  —  with  the  Malay  element  predominant.  In 
the  course  of  many  centuries,  practically  complete  amalgamation 
has  taken  place. ^  Apparently  the  islands  were  invaded  from  the 
mainland  of  Asia.  The  earliest  date  of  what  is  beheved  in  Japan 
to  be  authentic  history  is  660  b.c.^ 

The  territorial  and  strategic  position  occupied  by  the  so-called 
great  powers  to-day  is  the  result  of  centuries  of  change,  usually 
of  countless  wars,  in  all  cases  of  generations  of  painful  develop- 
ment.   Even  now  in  the  Great  European  War  Europe  is  being 

1  Encyclopedia  Britannica  (nth  ed.,  1911),  vol.  xxv,  pp.  228-30. 
^  Ibid.,  p.  873. 
'  Ihid.,  vol.  XV,  p.  165. 

*  Carl  Ploetz,  Epitome  0/  Ancient,  Mediaval  and  Modern  History  (12th  ed.,  Boston), 
P-33. 


lO        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

remade.    Not  only  the  territory,  but  the  population,  resources, 
power,  and  prestige  of  the  great  nations  of  the  world 

Changes  in  ^  '  ^  f'  ° 

leadership  of  are  in  the  blast  furnace.  It  has  ever  been  so.  This 
great  war,  to  be  sure,  appears  to  be  one  of  the  colos- 
sal upheavals  that  occur  only  at  long  intervals;  but  civilization 
like  nature  never  stands  still.  The  scepter  has  passed  from  Egypt 
to  Babylonia  and  Assyria,  from  Assyria  to  Persia,  from  Persia  to 
Greece,  from  Greece  to  Rome;  it  has  rested  for  a  time  with  the 
Venetian  and  Florentine  Republics;  it  has  passed  to  Spain,  to 
France,  to  England:  it  is  passing  now  to  the  United  States  of 
America  —  or  so  it  would  seem.  All  that  is  certain  is  that  the 
leadership  of  civilization  and  the  relative  rank  of  the  nations  of 
the  world  will  not  remain  forever  the  same. 

If  we  glance  at  the  history  of  the  leading  nations  of  to-day,  we 
shall  be  in  a  better  position  to  understand  their  present  status  and 
Development  Credit.  Everybody  is  familiar  with  the  origin  and 
and  of'rhe*  development  of  the  United  States,  and  almost  every- 
United  States  body  has  a  good  idea  of  English  history  from  Roman 
times  to  the  present.  These  are  preeminently  the  nations  which 
have  developed  the  individualistic  ideal  and  have  evolved  through 
patient  struggle  free  institutions  and  constitutional  government. 
They  have  based  their  institutions  on  the  common  law;^  and  they 
have  fought  steadily  for  liberty,  self-sufficiency,  and  equality 
under  the  law. 

Modern  France  is  a  product  of  many  forces  and  of  many  condi- 
tions. After  the  great  Frankish  Empire  of  Charlemagne  was  di- 
^   ,.      ,  vided  through  the  Treaty  of  Verdun  in  Sa'^  a.d., 

Outhne  of  . 

French  there  developed  Germany  from  the  East  Frankish 

^  '^^  portion  and  France  from  the  West  Frankish.    The 

people  of  the  East  Frankish  kingdom  were  predominantly  of 
Germanic  stock,  those  of  the  West  Frankish  were  predominantly 
of  Romance  or  Latin  stock. ^  Gradually  there  arose  in  France 
the  familiar  struggle  between  the  central  authority  or  king 
and  the  great  nobles.  At  first  the  nobles  were  too  strong  for 
the  king,  and  the  central  authority   developed  late.     This  is 

^  See  A.  Lawrence  Lowell,  TJie  Governments  of  France,  Italy  and  Germany  (Cam- 
bridge, 19 14),  p.  50,  and  note  beginning  on  p.  65. 
a  Ploetz,  p.  1S7. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS     II 

one  of  the  striking  differences  between  French  and  EngHsh 
history.^  The  struggle  in  France  ended,  however,  in  the  ahnost 
complete  victory  of  the  central  authority  under  Louis  XIV.  In 
that  reign,  what  Buckle  ^  has  called  "the  protective  spirit"  ex- 
tended to  every  phase  of  government  and  even  to  every  phase  of 
intellectual  activity.  IndividuaHty  and  the  spirit  of  independence 
were  dead.  The  seeming  unity,  strength,  and  prosperity  of  France 
under  Louis  XIV  were  seeming  only.  There  followed,  after  a  con- 
siderable delay,  to  be  sure,  the  fierce  but  purifying  flames  of  the 
French  Revolution,^  Then  from  democracy,  rampant,  unrea- 
soning, atheistical,^  there  had  to  be  evolved  again,  slowly  and 
painfully,  order  and  Hberty  under  law.  Centralization  remained 
to  a  great  degree,  —  perhaps  greater  than  ever,  —  but  it  was  a 
centralization  deriving  its  authority  from  the  people  instead  of 
from  a  hereditary  king.^  Now  we  have  a  chance  to  read  the  latest 
chapter  —  the  effort  of  republican  France  to  regain  something 
of  the  power  and  prestige  among  the  nations  of  the  world  that  it 
had  before  1870  and  to  evolve  a  workable  and  stable  system  of 
parHamentary  government. 

From  the  death  of  Charlemagne  (814  a.d.)  to  the  crowning  of 
William  I  of  Prussia  as  German  Emperor  (1871),  what  is  now 
Germany  has  been  most  of  the  time  broken  up  into   ^   ,. 

1  1  r  n    -I  •        1  Outline  of 

a  large  number  of  small  kingdoms  or  states.  The  German 
Holy  Roman  Empire  —  which  endured  not  only  as  ^  °^ 
a  name,  but  as  an  ideal  for  over  a  thousand  years  —  under  Charle- 
magne and  under  Otto  I  (936-73  a.d.)  and  his  successors  of  the 
Hohenstaufen  line  was  a  great  reahty  —  a  powerful  united  Em- 
pire.^ Modern  Germany  —  or  Germany  under  the  leadership  of 
Prussia  —  really  derives  from  the  old  North  mark,  or  the  mark  or 

^  Lowell,  p.  51. 

2  Henry  Thomas  Buckle,  History  of  Civilization  in  England  (New  York,  1858), 
vol.  I,  chap.  XI. 

3  Ibid.,  chap.  xn. 

*  The  reason  why  the  French  Revolution  attacked  religion  —  why  it  set  up  the 
"Goddess  of  Reason"  —  was  that  the  prerevolutionary  writers  like  Voltaire  and 
Rousseau  attacked  the  abuses  of  the  clergy  even  before  they  attacked  the  abuses  of 
the  Government.  Church  and  State  were,  moreover,  closely  intertwined.  The  clergy, 
as  in  England  before  the  Great  Rebellion,  stood  on  the  side  of  the  conservative  — 
the  reactionary  element.   (Buckle,  vol.  i,  chaps,  xi  and  xn.) 

*  Lowell,  p.  35. 

8  James  Bryce,  The  Holy  Roman  Empire  (New  York,  1904),  pp.  215-16,  and  384. 


12        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

boundary  lying  along  both  banks  of  the  middle  Elbe  established 
by  the  Germans  against  the  Wends  or  Slavs;  just  as  Austria  de- 
rives from  the  Bavarian  Ostmark  or  East  mark  along  the  south 
bank  of  the  Danube  east  of  the  river  Ems,  founded  about  800  a.d.^ 
In  141 5,  the  German  Emperor  invested  Frederick,  Burgrave  of 
Nuremburg,  a  Hohenzollern,  with  the  mark  Brandenburg  —  ly- 
ing east  and  west  of  the  Elbe  in  the  district  about  the  old  North 
mark.^  From  that  time  until  the  formation  of  United  Germany 
under  William  I,  the  only  rulers  who  stand  out  conspicuously  are : 
Frederic  William,  the  Great  Elector  of  Brandenburg,  who  wrested 
East  Prussia  from  Poland  ^  and  carried  out  various  internal  re- 
forms; Frederic  William  I,  who  established  a  formidable  army, 
left  an  overflowing  treasury,  and  laid  the  foundation  of  the  future 
power  of  Prussia;^  and  Frederic  II,  the  Great  (1740-86),  who 
added  Silesia  and  Polish  Prussia  to  his  kingdom  and  revived  the 
political  and  intellectual  life  of  Germany  under  the  leadership  of 
Prussia.^  The  successful  war  of  Prussia  and  Austria  against 
Denmark,  by  which  the  victors  obtained  Schleswig,  Holstein,  and 
Lauenburg  (1864);^  the  war  of  Prussia  against  Austria  in  1866, 
by  which  Prussia  obtained  Schleswig-Holstein,  Hanover,  and 
other  territory  and  established  her  supremacy  over  Austria  in  the 
leadership  of  Germany;^  and  the  Franco-Prussian  War  of  1870 
resulted  in  the  unification  of  Germany  under  the  leadership  of 
Prussia  and  the  establishment  of  modern  Germany  as  a  great 
power. 

Italy  like  Germany,  since  the  fall  of  the  Western  Empire  (476 
A.D.),  has  been  torn  and  pieced  together  again  and  again.  Odo- 
^  ,.      ,  vakar  (Odoacer),  leader  of  German  tribes,  after  the 

Outline  of  ^  ^  ,  1        •      T      1      o 

Italian  fall  of  the  Western  Empire  became  ruler  m  Italy.^ 

^  °^  Later  the  Ostrogoths  under  Theodoric  conquered 

Italy;  and  still  later  the  Lombards  conquered  the  country  as  far 

south  as  the  Tiber.^    For  a  long  period  portions  of  Italy  were 

1  Encyclopedia  Britannica  (1910),  vol.  m,  p.  5,  and  vol.  rv,  p.  420.  Ploetz,  pp. 
194-96.  For  map  of  the  old  marks,  see  F.  W.  Putzger's  Historischer  Schul-Atlas 
(Bielefeld  und  Leipzig,  1895),  p.  15. 

2  Ploetz,  p.  252,  and  Putzger,  pp.  18-19. 

'  Ploetz,  p.  373,  and  Price  Collier,  Germany  and  the  Germans  (New  York,  1914), 

P-  31- 

*  Ploetz,  p.  397,  and  Collier,  p.  33.  *  Collier,  p.  36.  ^  Ploetz,  p.  506. 

»  Ibid.,  p.  sio.  *  Ibid.,  p.  173.  »  Ibid.,  pp.  174-75- 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    1 3 

included  in  the  old  German  Empire.  Modern  Italy  dates  from 
the  war  of  France  and  Sardinia  against  Austria  (1859)  and  the 
liberation  of  Italy  from  Austria.^  The  outstanding  figures  of 
this  period  are  Count  Cavour  and  Victor  Emmanuel.  In  186 1 
practically  aU  Italy,  except  Venice  and  the  Papal  territory,  were 
united  under  one  scepter.^ 

The  thrones  of  Austria  and  Hungary  —  which  latter  country 
was  inhabited  as  early  as  the  ninth  century  a.d.  by  the  Magyars, 
a  nomadic  Finnish  tribe,  which  gradually  had  made  its  way  from 
the  Ural  region  toward  Europe  ^  —  were  occupied  by  the  same 
ruler,  at  intervals,  as  early  as  the  fifteenth  century.  In  1687, 
the  hereditary  succession  to  the  throne  of  Hungary  was  conferred 
on  the  male  line  of  Austria;  and  by  the  Pragmatic  Sanction  was 
allowed  to  pass,  in  case  of  necessity,  to  the  female  Hne.  In  accord- 
ance with  this  settlement,  Maria  Theresa,  archduchess  of  Austria, 
ruled  also  as  Queen  of  Bohemia  and  Hungary  from  1740  to  1780. 
Austria  was  the  leader  of  the  German  Confederacy  Austria- 
formed  toward  the  close  of  the  Napoleonic  wars  and  Hungary 
later  renewed  or  reestablished.  On  the  abdication  of  his  uncle  in 
1848,  Francis  Joseph  I,  the  present  Emperor,  became  Emperor 
of  Austria.  The  Hungarian  Diet  refused  to  recognize  his  acces- 
sion, and  an  uprising  of  the  Magyars  against  the  House  of  Haps- 
burg  resulted  in  the  practical  independence  of  Hungary.^  The 
revolt  finally  was  put  down  with  the  help  of  Russia.  In  1867 
the  old  constitution  of  Hungary  —  which  had  been  abolished  by 
Austria  in  1849  —  was  restored;  and  Francis  Joseph  I,  Emperor 
of  Austria,  was  crowned  King  of  Hungary.^  The  Dual  Monarchy, 
as  it  is  called,  probably  contains  the  greatest  diversity  of  races  in 
contiguous  territory  and  under  one  government  of  all  the  great 
powers. 

The  history  of  modem  Russia  begins  with  Peter  I,  the  Great 
(1689-17 25).  In  the  ninth  century,  bands  of  Swedes  settled  around 
Novgorod,  subjugated  the  Slavs  and  laid  the  foun- 
dation  of  the  future  Empire  of  Russia.^    For  two   Russian 
hundred  and  fifty  years,  ending  in  1480,  Russia  was     '^  °^ 

^  Ploetz,  p.  502.  2  7J/j.^  p.  J03.  '  Ihid.,  pp.  193-94  and  277. 

*  See  Encydopcedia  Britannica  (1910),  vol.  xni,  p.  916. 

6  Ploetz,  pp.  278,  372,  398,  4CX),  483,  495,  498,  sio-ii.  6  /j/j/.^  p.  208. 


14        MIERICAN  AND  FOREIGN  INVESTMENT  BONDS 

in  the  hands  of  the  Mongols.  In  the  fourteenth  century,  Moscow 
became  the  national  center  of  Russia.^  Toward  the  close  of  the 
sixteenth  century,  Russians  began  to  emigrate  into  Siberia  and 
within  eighty  years  had  reached  the  Amur  and  the  Pacific.^  Peter 
the  Great,  in  his  effort  to  Europeanize  or  modernize  Russia, 
founded  the  city  of  St.  Petersburg  (1703).^  The  reign  of  Catherine 
II  added  much  to  the  power  and  prestige  of  Russia.  During  her 
reign  there  took  place  the  three  divisions  of  Poland  (1772,  1793, 
and  1795)  which  have  been  the  cause  of  so  much  discord  in  Europe 
since.^  Vast  in  territory,  with  a  population  of  ovej  one  hundred 
and  seventy  millions,  Russia  lacks  and  always  has  lacked  one 
thing  —  an  ice-free  port.  For  one  hundred  years  she  has  set  her 
eyes  on  Constantinople,  and  is  fighting  for  it  in  the  present  war. 
Only  one  other  of  the  great  powers  remains  to  be  discussed  — 
Japan.  We  have  spoken  of  the  origin  of  the  Japanese.  At  the  be- 
ginning of  historic  times,  according  to  the  Japanese 
Japanese  66o  B.C.,  the  form  of  government  in  Japan  was  that 

^  °^  of  an   empire  under  a   Mikado.^    In   the  seventh 

century  a.d.,  changes  took  place  which  resulted  in  the  military 
obtaining  predominance  over  the  civil  power,  and  the  actual  gov- 
ernment passed  from  the  Mikado  into  the  hands  of  a  usurping 
military  chieftain  —  later  called  the  Shogun.  The  final  outcome 
of  this  system  of  dual  government  was  a  feudal  system  correspond- 
ing in  large  measure  to  that  of  medieeval  Europe.^  After  1680, 
the  Shogun  became  a  shadow  and  the  great  mass  of  feudal  chiefs 
likewise.  The  government  really  fell  into  the  hands  of  the  vassals. 
This  state  of  affairs,  with  its  oppression,  weakness,  and  anarchy, 
lasted  until  1868.  The  revolution  which  involved  the  fall  of  the 
Shogunate  and  ultimately  of  feudalism,  though  essentially  im- 
perialistic in  its  prime  purposes,  may  be  called  democratic  with 
regard  to  the  personnel  of  those  who  planned  and  directed  it. 
There  took  place  under  the  guidance  of  the  nobles  and  the  Samu- 
rai a  restoration  of  the  administrative  power  to  the  Emperor.'^ 
Japan  in  1854  had  been  reopened  to  the  Western  world  by  the 

*  Ploetz,  p.  277. 

2  Encyclopcedia  Britannica  (nth  ed.),  vol.  xxv,  pp.  17-18. 
'  Ploetz,  p.  395.  *  7/)/^.,  pp.  411,  413-14. 

^  Ibid.,  p.  2>3-  '  Ibid.,  pp.  212-13. 

'  Encyclopadia  Britannica  (nth  cd.),  vol.  xv,  pp.  264-65. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    1 5 

American  naval  officer  Commodore  Perry. ^  She  became  one  of 
the  great  powers  by  defeating  Russia  in  the  war  of  1904-05. 
Later  she  established  her  rule  over  Korea  and  her  dominance 
over  China. 

Such  described  in  a  very  brief  way  is  the  origin  and  develop- 
ment of  the  great  modern  nations  —  the  nations  whose  credit  is 
under  special  consideration  in  this  chapter.   In  view   Bearing  of 
of  the  fact  that  national  obligations  depend  princi-   development 
pally  for  their  payment  on  national  good  faith,  we   °°  ^^^^'^ 
consider  these  historical  facts  of  interest  and  of  importance  m 
attempting  to  estimate  national  credit. 

The  credit  of  any  nation  at  any  given  time  may  be  said  to  be 
determined  by  three  leading  considerations :  — 

(i)  Its  debt  statement  or  the  size  of  its  debt  compared  with  its 
resources  and  with  its  population. 

(2)  Its  debt  history  or  its  record  of  good  or  bad   consWeratio^ns 

r„:fU  in  estimating 

^^■lin.  ^  national 

(3)  Its  general  standing  with  the  other  nations   cxedit 
of  the  civilized  world. 

Under  the  last  heading  come  such  considerations  as  the  mili- 
tary position  of  a  nation,  the  form  and  stability  of  its  govern- 
ment, the  character  of  its  population  and  of  its  institutions,  its 
trade  position  and  its  general  economic  and  financial  status. 

In  order  to  understand    the    abnormal    conditions  affecting 
credit  created  by  the  great  war,  it  is  first  necessary   -^^^^^^  ^^^_ 
to  know  the  normal  conditions  or  the  conditions  be-   ditions  vs. 

the  war 

fore  the  war. 

Let  us  consider  first  what  may  be  called  the  obvious  or  natural 
reason  for  the  credit  of  a  nation  or  for  the  prices  of  its  government 
bonds;  that  is,  the  size  of  the  debt  compared  with   population, 
the  estimated  resources  and  with  the  population,   wealth  and 

.  .         .  debt  of  the 

The   accompanymg   table   (Table  I)    gives    recent   leading  civilized 
estimates  of  population  and  wealth  and  recent  figures 
of  the  debts  of  the  United  States,  Great  Britain  and  Ireland,  Ger- 
many, France,  Russia,  Austria-Hungary,  Italy,  and  Japan. 

It  is  very  difficult  to  give  figures  of  estimated  resources  suffi- 
ciently accurate  to  be  of  great  value  in  figuring  percentage  of  debt 

1  Ploetz,  p.  563. 


1 6        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

to  resources.  At  the  same  time  it  is  desirable  to  try  to  form  at  least 
some  general  idea  of  the  proportion  between  wealth  and  debt. 
Percentages,  figured  from  estimates  of  wealth  which  differ  so  much 

TABLE  I 


CoutUry 


United  States 

Great  Britain 

and  Ireland 

Germany  i 

France  

Russia  2 

Austria-Hungary. . 

Italy 

Japan 


Estimated 
Population ' 


9S,4ii,ooo 

45,663,000 
66,146,000 
39,660,000 
167,920,000 
50,237,000 
35,026,000 
52,312,000 


Estimated  Wealth* 


$187,739,071,0905 


06,400 
76,800 
62,400, 
40,000, 
25,000, 
20,000, 
9.749, 


,000,000  ° 
,000,000 ' 
,000,000  ' 
,000,000  8 
,000,000  8 
,000,000  ' 
,040,000  ' 


Debt 


$1,026,686,026  10 

3,479,070,854  11 
4,869,674,212  IS 
6,343,622,400  " 
4.538,654,400  iJ 
3,812,798,400  1* 
2,578,435,200  i« 
1,251,316,800  1' 


Wealth 

Debt  per 

per  capita 

capita 

$1967.69 

$  10.76 

1892.12 

76.19 

1161.07 

73.62 

1573-37 

159-95 

238.21 

27.03 

497.64 

7590 

571.00 

73.6i 

186.36 

23.92 

a,5 


.55 

403 
6.34 
10.17 
11-35 
15-25 
12.89 
12.84 


The  figures  in  this  table  are  reduced  to  dollars  on  the  basis  of 

Dollar  =    4     shillings  2  pence  English.  Franc  =  9.6  pence  English. 

Mark   =  11.8  pence  English.  Yen     =  2  shillings  J  pence  English. 


1  German  Empire  and  States.  '  Exclusive  of  Finland. 

'  Statislical  Abstract  for  the  Principal  and  Other  Foreign  Countries  in  each  Year  from  iqoi  to  rgrs,  no. 
39  (London,  i9i4),pp.  12-13.  Population  of  the  United  States  estimated  as  of  June  1,  1912;  of  Great 
Britain  and  Ireland,  Germany  and  Italy,  as  of  June  30,  1912;  of  France,  Austria-Hungary,  and  Japan, 
1912;  and  of  Russia,  1911. 

*  Figures  for  estimated  wealth  as  given  by  different  authorities  vary  greatly.  For  instance,  the  Paish 
estimate  for  the  United  States  in  1914  figures  about  $144,000,000,000,  and  the  German  estimate  of 
HelfFerich  for  191 1  {Germany's  Economic  Progress  arui  National  Wealth,  i8S8-igi3,  by  Dr.  Karl  Helf- 
ferich,  director  of  the  Deutsche  Bank  [Germanistic  Society  of  America,  1914I,  p.  115)  about  Si  18,000, - 
000,000;  the  Paish  estimate  for  Great  Britain  and  Ireland  in  1914  comes  to  about  $81,600,000,000;  the 
Helfferich  estimate  for  Germany  in  1911  amounts  to  about  $70,800,000,000  (Helfferich,  p.  113);  the 
Paish  estimate  for  France  in  1914  amounts  to  about  $48,000,000,000  and  the  estimate  of  Thery  in  1908, 
$54,870,000,000  (see  Helfferich,  p.  114);  the  Economist  estimate,  by  implication,  for  Russia  and  Austria- 
Hungary  in  1913  amounts  in  each  case  to  about  $43,200,000,000.  The  estimates  given  from  the  Commer- 
cial and  Financial  Chronicle,  for  Russia,  Austria-Hungary,  and  Italy,  are  given  in  the  New  Websterian  Dic- 
tionary (1912.  p.  1039),  as  coming  from  the  Bureau  of  Statistics,  Department  of  Commerce  and  Labor, 
but  they  do  not  so  come.  The  original  source  of  these  estimates  is  unknown  to  the  writer;  but  the  esti- 
mates are  reasonable  in  view  of  earlier  estimates  of  the  wealth  of  the  same  countries. 

^  Estimate  for  19x2.  Department  of  Commerce,  Bureau  of  the  Census,  Estimated  Valuation  of  Na- 
tional Wealth,  18S0-IQ12  (Washington,  1915),  p.  15. 

6  Estimate  for  1913,  Economist  (London),  vol.  Lxxx,  p.  51. 

'  Estimate  for  1913,  Economist,  vol.  Lxxx,  p.  51;  and  Paish  estimate  for  1914,  Statist  (London),  vol. 
LXXX.  p.  419. 

8  Commercial  and  Financial  Chronicle,  vol.  100,  p.  932. 

9  Encyclopedia  Britannica  (11th  ed.),  vol.  xv,  p.  219.  Estimated  from  Statistics  for  the  Year  iqo4-os. 

1"  Principal  of  the  public  debt,  July  i,  1912,  less  net  available  cash  in  Treasury  (except  agency  ac- 
count), June  30,  1912.  United  States  Treasury  Department,  Circular  no.  52  (Washington,  1913),  pp. 
19,  22. 

"  Aggregate  gross  liabilities  March  31,  1912.  Statistical  Abstract  for  the  United  Kingdom  in  Each  of 
the  Last  Fifteen  Years  from  iSqq  to  IQ13,  no.  61  (London,  1914),  p.  10. 

12  Total  public  debt  of  German  Empire,  year  ending  March  31,  1912.  Total  funded  and  floating  pub- 
lic debts  of  26  States  January  i  to  April  i,  191 2.  (Figures  for  Bremen  and  Hamburg  include  munici- 
pal debt.)  Statistical  Abstract  for  tlie  Principal  and  Other  Foreign  Countries,  no.  39  (London,  1914), 
p.  437.    Debt  of  Empire,  $1,165,166,400;  debt  of  States,  $3,704,507,812. 

"  Total  capital  of  the  public  debt  January  1,  1912,  R6publiriue  Francaise,  Ministcrc  du  Travail  et  de 
la  Prevoyance  Sociale.  Statistique  G6n<;ral  de  la  France,  Annuaire  Statistiqiie  (Paris,  1913,  statistics  for 
1912,  Imprimeric  Nationale),  vol.  xxxii,  p.  133*. 

1*  Total  public  debt  of  Russian  Empire  January  i,  1912.  Statistical  Abstract  for  the  Principal  and  Other 
Foreign  Countries  (191.1),  p.  .tu- 

>'  Total  combined  Austrian  and  Hun;;arian  public  debts,  1912.   Ibid.,  p.  450. 

'•  Total  "  effective  "  public  debt,  year  ending  June  30,  1912.  Ibid.,  p.  445. 

i'  Total  public  debt  March  31,  1912.  Ibid.,  p.  460. 


UNITED   STATES  AND  FOREIGN  GOVERNMENT  BONDS     1 7 

in  certain  cases  from  other  estimates,  should  be  used  only  in  con- 
nection with  other  data  in  estimating  the  burden  of  the  debt.  This 
table  shows  the  United  States  by  far  in  the  lead  of  all  other  nations 
in  the  amount  of  total  wealth  or  resources.  The  wealth  of  Great 
Britain  and  Ireland,  while  less  than  half  that  of  the  United  States, 
is  shown  to  be  larger  than  that  of  any  other  great  nation  —  with 
Germany  a  close  third  and  France  with  a  total  wealth  estimated  at 
$14,400,000,000  less  than  that  of  Germany.  The  table  shows  also 
the  United  States  with  the  smallest  actual  debt  and  very  much  the 
smallest  percentage  of  debt  to  resources.  Figured  on  this  percent- 
age basis,  the  burden  of  debt  is  next  lightest  on  Great  Britain  and 
Ireland,  then  on  Germany,  then  on  France,  then  on  Russia,  then  on 
Japan,  then  on  Italy,  and  heaviest  of  all  on  Austria-Hungary.  In 
the  matter  of  per-capita  wealth,  the  United  States  is  not  greatly 
ahead  of  Great  Britain  and  Ireland,  but  both  these  countries  are 
considerably  ahead  of  France,  very  much  ahead  of  Germany,  and 
in  an  entirely  different  class  from  all  the  other  nations  considered. 
The  debts  figured  on  a  per-capita  basis  show  a  very  small  debt  for 
the  United  States,  moderate  debts  for  Japan  and  Russia,  large  and 
substantially  equal  debts  for  Italy,  Germany,  Austria-Hungary, 
and  Great  Britain  and  Ireland,  and  an  abnormally  heavy  debt  for 
France. 

In  estimating  the  burden  of  debt  it  is  a  matter  of  considerable 
importance  to  know  what  proportion  of  the  debt  represents  income- 
producing  property,  such  as  railways,  and  what  pro-   Assets  off- 
portion  may  be  called  non-productive  or  dead-weight   some"extent 
debt.  It  is  also  important  to  know  whether  any  other   ii^tionai  debts 
assets  exist  which  properly  may  be  considered  as  an  offset  to  at 
least  a  part  of  the  debt.  For  instance:  from  the  debt  of  the  United 
States  in  191 2,  in  estimating  its  true  burden,  we  may  fairly  deduct 
$134,631,980  of  Panama  Canal  bonds ;^  from  the  debt  of  Great 
Britain  and  Ireland  we  may  fairly  deduct  estimated  market  value 
of  Suez  Canal  shares,  $211,420,800,  and  other  assets,  $17,781,053, 
or  a  total  of  $229,201,853 ;  ^  from  the  combined  debt  of  the  German 
Empire  and  the  twenty-six  German  States  we  may  properly  deduct 
$4,077,387,590  as  the  estimated  cost  of  construction  on  a  mileage 

^  U.S.  Treasury  Department,  Circular  52,  p.  17, 

'  Statistical  Abstract  for  The  United  Kingdom,  no.  61  (London,  I9i4),p.  10. 


1 8        AJMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

basis  of  the  government-owned  railways;  ^  from  the  debt  of  France 
we  should  not  only  deduct  the  value  of  the  state  railways  actually 
owned,  say,  $821,548,997,  but  should  take  into  consideration  the 
fact  that  between  1950  and  1958  practically  all  the  railways  of 
France,  valued  in  191 1  at  $3,701,184,000,  after  amortizing  them- 
selves will  become  the  property  of  the  Government;^  from  the  debt 
of  Russia  we  may  deduct  $1,557,633,600  incurred  on  account  of 
railways;  ^  from  the  debt  of  Austria-Hungary  we  may  deduct,  say, 
$2,079,198,749  as  the  value  of  the  22,034  miles  of  state  railways,^ 
and  also  from  the  debt  of  Italy  we  should  deduct,  say,  $1,131,300- 
000  as  the  cost  of  construction  of  the  Italian  state  railways;  ^  and 
from  the  debt  of  Japan  we  should  deduct,  say,  $290,534,400  as  the 
value  of  state-owned  railways.^  In  deducting  the  value  of  railways 
from  national  debts,  it  should  be  noted  that  there  is  a  great  differ- 
ence in  the  revenue-producing  powers  of  the  state  railways  in 
different  countries:  for  instance,  the  railways  of  Prussia-Hesse 
in  Germany  are  operated  with  such  success  financially  as  to  be  a 
source  of  considerable  net  income  to  the  State  above  the  charges 
on  their  capital;  the  railways  of  Japan  also  have  been  a  financial 
success;  those  of  Russia,  on  the  other  hand,  have  been  up  to  date  so 
unprofitable  as  to  compel  as  a  whole  a  large  annual  contribution 
from  the  State  for  their  support.'^  The  government-owned  railways 
of  Italy  have  failed  by  a  good  deal  to  earn  the  interest  on  their 
capital;  and  those  of  Austria-Hungary  usually  have  earned  less 
than  the  interest  on  their  debt.^  The  French  lines  are  beginning  to 
show  a  measure  of  prosperity.^  It  is  impossible  to  make  statements 

1  Statistical  Abstract  for  the  Principal  and  Other  Foreign  Countries,  no.  39  (London, 
1914),  pp.  387, 407.  As  a  further  set-off  against  the  debt  of  the  German  Empire,  there 
existed  in  1912  a  variety  of  invested  funds  as  well  as  the  war  treasure  at  Spandau  of 
about  $28,320,000;  and  as  a  further  set-off  against  the  debts  of  many  of  the  twenty- 
six  German  States,  there  existed  a  variety  of  funds  and  income-producing  property 
other  than  railways.   Statesman's  Y ear-Book,  igij  (London,  19 13),  pp.  869,  900-50. 

2  Statistical  Abstract  for  Foreign  Countries,  pp.  390,  407.  Samuel  O.  Dunn,  Govern- 
ment Ownership  of  Railways  (New  York  and  London,  1915),  p.  22. 

3  Statistical  Abstract  for  Foreign  Countries,  p.  431. 
*  Ibid.,  pp.  396-97,  408.    Dunn,  p.  382. 

5  Figures  for  1910,  Dunn,  p.  30.  Italy  has  various  other  income-producing  property 
including  the  Cavour  Canals.  Statesman's  Year-Book  (1913),  p.  990. 
8  Statistical  Abstract  for  Foreign  Countries,  p.  404. 
'  Dunn,  p.  317. 
8  Ibid.,  pp.  315-16. 
»  Ibid.,  p.  316. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    1 9 

absolutely  definite  about  such  matters  as  these;  but  it  is  perhaps 
fair  to  say  that,  taking  into  consideration  the  value  of  income- 
producing  property,  the  debt  of  Germany  in  191 2  was  less  of  a  bur- 
den on  the  resources  and  population  of  the  country  than  that  of 
any  other  nation  except  the  United  States,  and  that  the  debt  of 
Great  Britain  and  Ireland  was  probably  the  largest  dead-weight 
debt  —  with  the  possible  exception  of  Russia  —  of  any  country  in 
the  world,  but  was  not  by  any  means  the  most  burdensome  on  the 
resources  and  population  of  the  country. 

There  is  another  way  in  which  we  may  estimate  the  burden  of 
debt  —  that  is,  by  comparing  the  annual  debt  charge  with  the 
estimated  national  income  or  earnings  of  the  people  Debt  charge 
and  with  the  annual  government  expenditure.  Table   national'^  "^^^ 
II  shows  estimated  national  income,  annual  debt  income 
charge  and  percentage  of  debt  charge  to  national  income,  wherever 
recent  reliable  data  can  be  obtained,  of  the  countries  under  special 
consideration  in  this  chapter. 

This  table,  omitting  Italy  and  Japan  from  consideration,  shows 
the  burden  to  be  by  far  the  lightest  in  the  case  of  the  United  States 
and  the  heaviest  in  the  case  of  France.  In  connection  with  this 
table,  as  with  the  previous  one,  there  should  be  borne  in  mind  the 
income-producing  powers  of  the  various  state  railways  and  other 
productive  works.  ^  ,     , 

Debt  charge 

Table  III  shows  total  government  revenue   and   compared 
expenditure,   debt   charge  and  percentage  of  debt   government 
charge  to  total  expenditure  for  the  same  countries.   ^^p^°^'*^''^ 

This  table  shows  the  percentage  of  debt  charge  to  government 
expenditure  to  be  much  the  smallest  in  the  case  of  the  United 
States  and  the  largest  in  the  case  of  France  —  with  Japan  a  close 
second. 

In  the  three  tables  referred  to  we  have  applied  various  tests  to 
the  debt  statements  of  the  leading  civilized  nations  in  an  effort  to 
estimate  from  this  point  of  view  their  credit.  It  mav   ^ 

i_        r  •  ^    '   n       1  i    •  Growth  in 

be  of  mterest  to  trace  bneny  the  growth  m  popula-  population, 
tion,  wealth,  and  income  and  the  increase  in  debts  of  income,  and 
the  great  nations  of  the  world.   It  must  be  remem-  ^^^^ 
bered  that  almost  all  figures  of  this  kind,  even  figures  of  debts,  are 
approximations.  It  is  perhaps  not  unfair  to  say  that  hardly  any 


20      a:merican  and  foreign  investment  bonds 

two  authorities  agree  on  the  amount  of  a  nation's  debt  at  any 
given  time. 

As  giving  us  some  standard  to  appreciate  from  what  small  be- 
ginnings the  great  nations  of  to-day  have  developed,  we  would  say 
Growth  in  ^hat  the  population  of  the  Roman  Empire  at  the  death 

thryeadhT  °^      °^  Augustus,  14  B.c.,has  been  estimated  at  54,000,000, 
civilized  divided  as  follows:  Europe,  23,000,000;  Asia,  19,500,- 

000;   Africa,    11,500,000.^    The   population    of  the 

TABLE  II 


Country 


United  States 

Great  Britain  and  Ireland 

Germany 

France 

Russia 

Austria-Hungary 

Italy 

Japan 


Estimated  na- 
tional income  ^ 


$33,600,000,000 ' 

10,800,000,000  ' 

10,080,000,000  2 

6,000,000,000  2 

7,200,000,000 ' 

4,320,000,000  * 


National 
debt  charge  ' 


$22,616,000 ' 
117,600,000  ^* 
215,065,0548 
244,358,4008 
199,428,156  '1 
162,286,000  1' 
86,606,400  12 
72.134.370  " 


National  in- 
come per 
capita 


$352. 16 

236.52 

152.39 

151.29 

42.88 

85.99 


National 
debt  chars^e 
per  capita 


$  .24 
2.58 
3.2s 
6.16 
1. 19 
3.23 
2.47 
1.38 


Percentage 

of  debt 

charge  to 

income 


.07 
1.09 
2.13 
4.07 

2.77 
3-76 


Dollar  =  4  shillings  2  pence  English. 
Mark    =11.8  pence  English. 
Franc   =    9.6  pence  English. 


Austrian  krone  and  Hungarian  korona  =  10  pence  English. 
Russian  rouble  =  2  shillings  ij  pence  English. 
Japanese  yen  =  2  shilhngs  h  pence  English. 


1  Estimate  of  Sir  George  Paish  in  1914  in  the  Statist,  vol.  Lxxx,  p.  419. 

'  Estimate  for  1913.   Economist  (London),  vol.  LXXx,  p.  51. 

'  This  is  by  implication  the  Economist  estimate  for  1913  (vol.  LXXX,  p.  51).  The  total  national  income 
for  the  United  Kingdom,  France,  and  Russia  is  given  as  the  equivalent  of  $24,000,000,000  with  definite 
figures  for  the  United  Kingdom  and  France. 

*  Economist  estimate  by  implication  for  1913  (vol.  lxxx,  p.  51). 

6  These  estimates,  like  those  for  national  wealth,  should  be  used  with  great  care.  As  compared  with 
the  national  income  of  Great  Britain  and  Ireland  as  given  in  the  table.  Sir  George  Paish  (Statist,  vol. 
lxxx,  p.  419)  estimates  this  in  1914  at  about  $11,520,000,000;  the  Paish  estimate  for  Germany  made  at 
the  same  time  is  about  $9,600,000,000  and  for  France  about  $5,760,000,000  (Ihid.);  the  estimate  of  Helf- 
ferich  for  Germany  in  191 1  was  about  $9,440,000,000  (Germany's  Economic  Progress,  p.  99)  and  oi  Stein- 
man  Bucher  in  1908  (see  Webb,  A'eu>  Dictionary  of  Statistics  I1911),  p.  6,^0),  about  $8,400,000,000;  and 
the  estimate  of  A.  de  Lavergne  and  Paul  Henry  for  France  about  1907  (Webb  I1911),  p.  630)  was  from 
about  $4,320,000,000  to  about  $5,280,000,000.  The  most  recent  estimate  of  the  national  income  of  Italy 
which  we  have  found  is  that  made  by  Mulhall,  in  1888,  about  $1,747,200,000  (Mulhall,  Dictionary  of 
Statistics  [London,  1899],  p.  322).  So  far  as  we  know,  there  is  no  reliable  estimate  of  the  national  income 
of  Japan. 

«  Unless  otherwise  stated,  this  is  the  total  public  debt  charge  for  the  calendar  year  191 2. 

'  Interest  on  the  public  debt  for  the  year  ending  June  30,  1912.  Statistical  Abstract  for  the  Principal 
and  Other  Foreign  Countries,  No.  39  (London,  1914),  p.  456. 

8  Total  public  debt  expenditure  of  the  German  Empire  and  States,  year  beginning  April  i,  1912.  Sta- 
tistisches  JahrbuchfUr  das  Deutsche  Reich,  issued  by  Stalistischen  Amte  igij  (Berlin),  p.  346.  (Interest 
for  1912,  $176,967,668.) 

'  Total  annual  debt  expenditure,  1912  (total  interest  paid  $146,073,600),  R6publique  Franfaise,  Min- 
istfere  du  Travail  et  de  la  Prevoyance  Sociale.  Statistique  Gin^rale  de  la  France,  Annuaire  Stalistique 
(Paris,  1913,  Imprimerie  Nationale)  vol.  xxxn,  p.  133*. 

'"  Public  debt  services,  Russian  Empire,  1912  (interest  for  1911,  $188,688,743).  Statistical  Abstract  for 
Foreign  Countries  (1914),  p.  431. 

"  Statistical  Abstract  for  Foreign  Countries  (1914),  pp.  447,  449. 

"  Interest  on  "eflective"  debt,  year  ending  June  30,  1912.  Statistical  Abstract  for  Foreign  Countries 
(1914),  p.  445. 

"  National  debt  consolidation  fund,  year  ending  March  31,  1912.  Statistical  Abstract  for  Foreign 
Countries  (1914),  p.  459. 

i<  National  debt  services  for  year  ending  March  31,  1912.  Statistical  Abstract  for  the  United  Kingdom, 
no.  61  (London,  1914),  p.  5.   (Interest  of  funded  debt  for  191 2,  $72,972,969.60.) 

*  Estimated  by  Bodio  (Mulhall,  Dictionary  of  Statistics  [London,  1899],  p.  441). 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    21 

United  Kingdom  has  been  estimated  at  early  dates  as  follows:  1066, 
3,500,000;  1381,  3,860,000;  1528,  5,676,000.  The  population  of 
France  in  1328  has  been  estimated  at  10,000,000.^  The  population 
of  all  Europe  before  the  fifteenth  century  hardly  exceeded  50,000,- 
000.^  The  following  table  ^  shows  estimates  of  the  population  of 
what  are  now  the  leading  countries  of  Europe  at  intervals  of  one 

TABLE  III 


Country 

Total 
government 
revenue  ' 

Total 

government 
expenditure  ' 

Govern- 
ment 

revenue 
per  capita 

Govern- 
ment 

expendi- 
ture Per 
capita 

National  debt 
charge  "> 

Debt 

charge 

per 
capita 

a-§"3 
^  >-  a 

United  States 

Great  Britain 
and  Ireland 

Germany 

France 

Russia 

Austria- 
Hungary.  .  . 

Italy 

S  992,249,000  2 

888,433,373 ' 
681,129,600  * 
886,185,6006 

1,586,784,000  6 

1,025,635,200' 
549,105,600  8 
322,024,080' 

$965,274,000  - 

857,016,480 ' 

681,129,600  * 

926,308,800  6 

1,606,670,400  6 

1,039,526,400  ' 

549,105,600  8 
286,833,930  ' 

$10.40 

19.46 

10.30 
22.34 
9-45 

20.42 
15.68 
6.16 

$10.12 

18.77 
10.30 
23-36 
9-57 

20.69 

15.68 

S.48 

$  22,616,000  » 

117,600,000  18 
55,815,888  12 

244,358,400  15 
199,428,156  " 

162,286,000  15 
86,606,400  16 
72,134,3701' 

$.24 

2.58 

.84 

6.16 

I.IQ 

3.23 

2.47 
1.38 

2.34 

13.72 
8.19 
26.38 
12.41 

15.61 
IS. 77 

Japan 

25. IS 

Dollar  =  4  shillings  2  pence  English. 
Mark    =11.8  pence  English 
Franc   =    9.6  pence  English. 


Austrian  krone  and  Hungarian  korona  =  10  pence  English. 
Russian  rouble  =  2  shillings  ij  pence  English. 
Japanese  yen  =  2  shillings  J  pence  English. 


'  Total  government  revenue  and  expenditure,  unless  otherwise  stated,  given  for  calendar  year  1912. 

*  Year  ending  June  30,  1912.  Statistical  Abstract  for  Foreign  Countries  (London,  1914),  pp.  455-56. 

'  Year  ending  March  31, 1912.  Statistical  Abstract  for  the  United  Kingdom,  no.  61  (London,  1914),  p.  i. 

*  Budget  estimate  of  German  Empire  only,  year  beginning  April  i,  1912.  Statistical  Abstract  for  For- 
eign Countries  (London,  1914),  p.  436. 

'  Budget  estimate  of  1912.   Statistical  Abstract  for  Foreign  Countries  (London,  1914),  pp.  440-41. 

6  Statistical  Abstract  for  Foreign  Countries  ,  1914,  pp.  430-31. 

'  Total  combined  revenue  and  expenditures  of  Austria  and  Hungary,  1912.  Statistical  Abstract  for 
Foreign  Countries  (London,  1914),  pp.  446-47,  448-49. 

8  Budget  estimate  for  year  ending  June  30,  1912.  Statistical  Abstract  for  Foreign  Countries  (London, 
1914),  p.  444.  ,  ,.  ,  ^ 

*  Budget  estimate  for  total  revenue  and  expenditure  for  year  endmg  March  31,  1912.  Statistical 
Abstract  for  Foreign  Cottntries  (London,  1914),  pp.  458-59. 

1"  Unless  otherwise  stated,  this  is  the  total  public  debt  charge  for  the  calendar  year  1912. 

11  Interest  on  the  public  debt  for  the  year  ending  June  30,  1912.  Statistical  Abstract  for  the  Principal 
and  Other  Foreign  Countries,  no.  39  (London,  1914),  p.  457. 

12  Public  debt  charge,  German  Empire  only,  year  beginning  April  1,  1912.  Statistical  Abstract  for 
Foreign  Countries  (London,  1914),  p.  436. 

13  Total  annual  debt  expenditure,  1912  (total  interest  paid,  $146,073,600),  Republique  Frangaise, 
Ministere  du  Travail  et  de  la  Prevoyance  Sociale,  Statistique  Generate  de  la  France,  Annuaire  Statistique 
(Paris,  1913),  Imprimerie  Nationale,  vol.  xxxii,  p.  133*. 

n  Public  debt  services,  Russian  Empire,  1912  (interest  for  1911,  $188,688,743).  Statistical  Abstract 
for  Foreign  Countries  (London,  1914),  p.  431. 

16  Statistical  Abstract  for  Foreign  Countries  (London,  1914),  pp.  447,  449. 

16  Interest  on  "effective"  debt,  1912.  Statistical  Abstract  for  Foreign  Countries  (London,  1914),  p.  445. 

1'  National  debt  consolidation  fund.  Statistical  Abstract  for  Foreign  Countries  (London,  1914),  p.  459. 

18  National  debt  services  for  year  ending  March  31,  191 2.  Statistical  Abstract  for  the  United  Kingdom, 
no.  61  (London,  1914),  p.  5.   (Interest  of  funded  debt  for  1912,  $72,972,969.60.) 


^  Mulhall  (1899),  pp.  444-45. 

2  Estimated  by  Bodio  (Mulhall  [1899],  p.  441). 

'  Mulhall,  p.  441.  In  the  table,  England  at  present  stands  for  the  United  Kingdom 
of  Great  Britain  and  Ireland,  Prussia  for  the  German  Empire  and  Austria  for  Austria- 
Hungary.  The  1912  figures  are  from  table  on  p.  16. 


22        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 


hundred  years  from  1480  to  1880  inclusive,  and  the  estimated 
population  in  19 12. 

POPULATION 


1480 

1580 

i     1680 

J780 

1880 

igiz 

England . . . 

France 

Prussia 

Russia 

Austria .... 
Italy 

3,700,000 
12,600,000 
800,000 
2,100,000 
9,500,000 
9,200,000 

4,600,000 
14,300,000 
1,000,000 
4,300,000 
16,500,000 
10,400,000 

5,532,000 
18,800,000 

1,400,000 
12,600,000 
14,000,000 
11,500,000 

9,561,000 
25,100,000 

5,460,000 
26,800,000 
20,200,000 
12,800,000 

35,004,000 
37,400,000 
45,260,000 
84,440,000 
37,830,000 
28,910,000 

45,663,000 
39,660,000 
66,146,000 
167,920,000 
50,237,000 
35,026,000 

This  table  shows  France  greater  in  population  than  any  of  the 
other  countries  of  Europe  as  far  back  as  1480  —  twelve  years 
before  the  discovery  of  America;  it  shows  Austria  in  the  lead  in 
1580,  France  second,  and  Italy  third.  It  shows  France,  Austria, 
Russia,  and  Italy  all  having  a  greater  population  than  England  in 
1680.  It  shows  after  the  eighteenth  century  a  great  relative  gain 
for  Great  Britain  and  Ireland  as  compared  with  France  and  a  very 
large  gain  for  Germany  and  Russia.  The  population  of  the  Ameri- 
can colonies  and  of  the  United  States  at  various  dates  has  been 
as  follows:  ^ 

1673 160,000 

1701 297,000 

1750 1,161,000 

1775 2,803,000 

1790 3j93o>ooo 

1810 7,240,000 

1830 12,866,000 

i860 31,443,000 

1880 50,156,000 

1912 95,411,000 

This  table  shows  the  growth  in  population  of  the  American  na- 
tion from  little  more  than  bands  of  colonists  to  numbers  larger  than 
those  of  any  of  the  countries  of  Europe  except  Russia.  The  accom- 
panying table  (p.  23)  2  shows  the  population  of  the  United  States, 
Great  Britain  and  Ireland,  France,  Germany,  Austria-Hungary, 
Russia,  Italy,  and  Japan  for  1890,  1900,  and  1912. 

1  Estimates  apparently  of  Mulhall  until  1790,  then  census  figures.  Mulhall  (1899), 
p.  450.  The  19 1 2  figures  are  from  table  on  page  16. 

2  Mulhall  (1899),  pp.  442,  450.  Encyclopadia  Britannica  (nth  ed.,  1911),  vol.  19, 
p.  269.  Table,  p.  16. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    23 


United  States 

Great  Britain  and  Ireland 

France 

Germany 

Austria-Hungary 

Russia 

Italy 

Japan 


i8qo 


62,481,000 
38,200,000 
38,800,000 
48,600,000 
40,100,000 
92,000,000 
30,300,000 


igoo 


76,303,387 
40,909,925 

38,517,97s 
56,345,000 
45,089,531 
129,211,113 
32,449,754 
43,759,577 


igi2 


95,411,000 
45,663,000 
39,660,000 
66,146,000 
50,237,000 
167,920,000 
35,026,000 
52,312,000 


This  table  is  remarkable  chiefly  as  showing  the  great  growth  in 
population  of  Russia,  the  United  States,  and  Germany  and  the 
practically  stationary  condition  of  population  in  France.  The  pop- 
ulation of  all  Europe  in  1778  has  been  estimated  at  150,000,000,^ 
in  1882  at  327,800,000,^  and  in  1912  at  450,000,000.^  The  popula- 
tion of  the  world  in  1804  has  been  estimated  at  640,000,000,^  in 
1883  at  1,433,000,000,^  and  about  1912  at  1,732,000,000.^ 

The  growth  in  wealth  has  been  even  more  remarkable.  The 
following  figures  ^  for  the  wealth  of  England  and  Wales  or  of  the 
United  Kingdom  at  different  dates  may  be  of  interest:  ^ 


Date 

Country 

Estimated  wealth 

Authority 

1660 

England  and  Wales 

$1,200,000,000 

Petty 

1703 .... 

England  and  Wales 

2,352,000,000 

Davenant 

1763 

Great  Britain 

5,280,000,000 

Mulhall 

1812 

United  Kingdom 

10,512,000,000 

Colquhoun 

1816.... 

United  Kingdom 

11,520,000,000 

Mulhall 

1833 ■  •  •  • 

United  Kingdom 

18,000,000,000 

Pablo  Pebrer 

i860 

United  Kingdom 

26,688,000,000 

MulhaU 

1865.... 

United  Kingdom 

29,342,400,000 

Giffen 

1870 

United  Kingdom 

33,984,000,000 

MulhaU 

1885 .... 

United  Kingdom 

48,177,600,000 

Giffen 

1898 .... 

United  Kingdom 

56,688,800,000 

Mulhall 

1913 

United  Kingdom 

86,400,000,000 

Economist 

^  Estimated  by  Moheau  (Mulhall  [1899],  p.  441). 

2  Estimate  of  Behm-Wagner  (Mulhall  [1899],  p.  441). 

^  World  Almanac  (1915),  p.  62. 

*  Estimate  of  Malte-Brun  (Mulhall  [1899],  p.  441). 

^  Estimate  of  Behm-Wagner  (Mulhall  [1899],  P-  4ii)- 

*  World  Almanac  (1915),  p.  62. 

'  Reduced  at  the  rate  of  $4.80  to  the  poimd  sterling. 

^  Mulhall  (1899),  pp.  589,  700,  and  (1903),  p.  262.  Webb,  The  New  Dictionary  of 
Statistics  (London,  1911),  p.  629,  Table,  p.  16. 


24        AJMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Growth  in  wealth      The  wealth  ^  of  France  at  different  dates  has  been 

of  the  leading  ,.        ,     ,  r   ■,■,  o 

nations  estimated  as  follows:  ^ 


Date 

Estimated  wealth 

Authority 

1780 

$7,296,000,000 
8,640,000,000 
13,564,800,000 
20,928,000,000 
23,232,000,000 
33,600,000,000 
41,088,000,000 
46,512,000,000 
62,400,000,000 

La  Voisier 

1811: 

Chaptal 
Flaix 

18?? 

i86o 

Guyot 
Guyot 

186'; 

1871 

188=; 

Guyot 
Mulhall 

1898 

Estimated  figures  for  the  wealth  of  the  United  States  at  different 
dates  are  as  follows:  ^ 


Date 

Estimated  wealth 

Date 

Estimated  wealth 

$619,200,000 

1,065,600,000 

1,497,600,000 

1,680,000,000  * 

1,881,600,000 

2,649,600,000 

3,753,600,000 

1850 

i860 

1870 

1880 

1890 

1900 

1912 

$7,135,780,228 
16,159,616,068 
24,054,814,806 
43,642,000,000 

65,037,091,197 

88,517,306,775 

187,739,071,090 

1800 

1810 

1814 

1820 

18^0 

1840 

*  Estimate  of  Sir  George  Paish  (Statist,  vol.  ucxx,  p.  4ig). 

Comparisons  of  early  with  recent  estimates  of  the  wealth  of  cer- 
tain of  the  other  countries  under  consideration  are:  Aggregate  of 
the  German  States  in  18 14  probably  less  than  that  of  France,  or 
say  less  than  $9,600,000,000  compared  with  $76,800,000,000  in 
1913-14;  ■*  Italy,  in  1868,  about  $9,283,200,000,  and  in  1884,  from 
$10,272,000,000  to  $11,712,000,000  (Pantaleoni),  compared  with 
say  $20,000,000,000  in  1912;  and  Austria-Hungary,  in  1880,  about 

^  Reduced  at  the  rate  of  $4.80  to  the  pound  sterling. 

2  Mulhall  (1899),  pp.  591-92,  700.  Table,  p.  i6. 

3  Figures  from  1790  to  1840,  inclusive,  except  those  of  Sir  George  Paish,  from 
Mulhall  (1899),  p.  593.  Figures  from  1850  to  1912,  inclusive,  from  Department  of 
Commerce  (Bureau  of  the  Census,  Estijnatcd  Valuation  of  National  Wealth  1850- 
igi2  [Washington,  1915],  vol.  i,  pp.  20-21,  24-25).  —  Census  figures  are  not  always 
comparative.  The  figures  for  1850,  i860,  and  1870  are  exclusive  of  exempt  real  es- 
tate. Figures  for  1870  are  on  a  gold  basis. 

*  Sir  George  Paish,  Statist,  vol.  Lxxx,  p.  419,  and  tabic,  p.  16. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    25 


$18,240,000,000  (Beer),  compared  with  say  $25,000,000,000  in 
1912.^  The  following  table  ^  shows  estimates  by  Mulhall  of  the 
wealth  of  the  United  States  and  of  the  leading  nations  of  Europe  in 
1888  and  1898  compared  with  estimates  from  the  table  on  p.  16 
for  1912-13:  — 


1888' 


1898  f 


1 91 2-1 3% 


United  States 

Great  Britain  and  Ireland . 

France 

Germany 

Russia 

Austria-Hungary 

Italy 


B61, 536,000,000 
51,840,000,000 
42,720,000,000 
36,000,000,000 
27,840,000,000 
20,160,000,000 
13,920,000,000 


178,480,000,000 
56,668,800,000 
46,512,000,000 
38,649,600,000 
30,840,000,000 
21,657,600,000 
15,168,000,000 


$187,739,071,090 
86,400,000,000 
62,400,000,000 
76,800,000,000 
40,000,000,000 
25,000,000,000 
20,000,000,000 


•  Michael  G.  Mulhall,  Dictionary  of  Statistics  (4th  ed.,  London,  1899},  p,  589. 
t  Mulhall  (1899),  p.  700.  X  Table,  p.  16. 

Certain  recent  estimates  ^  of  the  wealth  ^  of  the  United  States, 
Great  Britain  and  Ireland,  the  British  Empire,  Germany,  and 
France  may  be  grouped  as  follows :  — 


United  States. 


Great  Britain  and  Ireland , 

British  Empire 

Germany 

France 


1903 
1904 
1912 

1903 
1905 
1913 

1903 

1902 
1908 
1908 
1913 

1908 


1908 
1913 


(Giffen) 

(Census) 

(Census) 

(Giffen) 

(L.  G.  Chiozza  Money) 

(Economist) 

(Giffen) 

(Schmoller) 
(Balled) 

(Steinman  Bucher) 
(Economist) 

(Lavergne 
&  Henry) 

(Thery)  ^ 
(Economist) 


!$o6,4oo,ooo,ooo 
107,104,192,410 
187,739,071,090 

72,000,000,000 
54,720,000,000 
86,400,000,000 

106,800,000,000 

48,000,000,000 
60,240,000,000 
76,800,000,000 
76,800,000,000 

43,200,000,000 

(Private  wealth 

only) 

54,870,000,000 

62,400,000,000 


*  Mulhall  (1899),  p.  592,  and  table,  p.  16. 

^  Reduced  at  the  rate  of  $4.80  to  the  pound  sterling. 

^  Webb,  New  Dictionary  of  Statistics  (1911),  pp.  629-30,  and  Department  of  Com- 
merce, Estimated  Valuation  oj  National  Wealth  (Washington,  1915),  p.  15,  and  table, 
p.  16. 


26        MIERICAK  AND  FOREIGN  IN\TSTMENT  BONDS 

From  the  time  of  the  close  of  the  Napoleonic  wars  until  the  dates 
of  the  most  recent  estimates,  the  wealth  of  France  has  increased 
between  six  and  seven-fold;  that  of  Great  Britain  and  Ireland,  over 
seven-fold;  that  of  Germany,  about  eight-fold;  and  that  of  the 
United  States,  nearly  one  hundred  and  twelve-fold.^  These  figures 
are  startUng  and  explain  in  great  measure  the  ease  with  which 
Europe  has  borne  the  debts  inherited  from  the  Napoleonic  wars 
or  created  in  the  one  hundred  years  since,  and  the  ease  with  which 
the  United  States  paid  off  its  Ci\dl  War  debt. 

The  development  of  the  national  income,  or  what  is  sometimes 

called  the  total  earnings  of  the  people,  has  been  no  less  remarkable 

,  .  than  that  of  wealth.    The  national  income  of  the 

Growth  in  _      .       ,  ^  ,         .  ,  ,  i  i         ^ 

national  Umtcd  Statcs  has  increased  from  less  than  $480,000,- 

000  in  1814  to  about  $33,600,000,000  in  1914;  that 
of  the  United  Kingdom  has  increased  from  about  $1,440,000,000  in 
1814  to  about  $11,520,000,000  in  1914;  that  of  France  from,  say, 
$1,200,000,000  in  1814  to  about  $5,760,000,000 in  1914;  and  that  of 
Germany  from  a  figure  probably  less  than  that  of  France  in  18 14 
to  about  $9,600,000,000  in  1914.^ 

The  increase  of  national  debts  has  been  very  great  but  very 
irregular.  As  will  be  shown  later,  large  increases  in  debt  usually 
^   _,. .  took  place  for  the  purposes  of  war.  The  table  on 

Growth  in  ^  . 

national  page  27  shows  approximate  figures  for  national  debts 

at  selected  dates  from  17 13  to  191 2  inclusive.  These 
dates,  with  the  exceptions  of  1889  and  191 2,  are  those  of  important 
historical  events;  namely,  17 13,  the  Treaty  of  Utrecht  which 
ended  the  War  of  the  Spanish  Succession;  1763,  the  Peace  of  Paris 
ending  the  Seven  Years'  War;  1793,  the  beginning  of  the  Reign  of 
Terror  in  France;  18 16,  the  end  of  the  Napoleonic  wars;  1848,  the 
year  of  Revolution  in  Europe;  and  1870,  the  outbreak  of  the 
Franco-Prussian  War. 

In  1889,  Spanish  America,  according  to  Mulhall,  had  debts 
amounting  to  about  $1,598,400,000;  India  had  a  debt  of  about 

^  Comparisons  are  made  on  the  basis  of  Sir  George  Paish's  figures  for  18 14  and  the 
figures  in  table  on  p.  16. 

^  Estimates  of  Sir  George  Paish  in  the  Siatist,  vol.  Lxxx,  p.  419.  These  estimates 
may  be  compared  with  those  of  the  Economist,  vol.  lxxx,  pp.  50-51.  For  estimates 
of  national  income  of  various  countries  at  dififerent  dates,  see  Webb,  New  Dictionary 
of  Statistics  (1911),  pp.  629-30,  and  Mulhall  (1899),  pp.  320-22  and  p.  747. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    27 


28        AJMERICAN  AND  FOREIGN  IN\TSTj\IENT  BONDS 

$892,800,000;  Turkey,  about  $864,000,000;  Australia,  about 
$820,800,000;  Portugal,  about  $542,400,000;  and  Egypt,  about 
$494,400,000.  As  Mulhall  remarks,  the  debts  of  the  world  increased 
from  1793  to  1889  —  a  period  of  ninety -six  years  —  just  about 
tenfold.^  The  origin  of  these  debts  or  the  purposes  for  which  they 
were  created  has  been  given  by  Mulhall  ^  as  follows:  — 

Armaments $17,328,000,000 

Railways  and  telegraphs 6,960,000,000 

Roads  and  bridges 3,744,000,000 

Sundries 772,800,000 

Total $28,804,800,000 

There  is,  it  is  to  be  noticed,  a  discrepancy  between  the  total 
amounts  of  this  table  and  the  one  on  the  preceding  page,  but  un- 
doubtedly the  second  table  tells  in  a  general  way  for  what  pur- 
poses the  money  borrowed  was  expended.  Figures  are  not  available 
showing  the  purposes  for  which  debts  were  created  up  to  191 2 ;  but 
probably  they  would  show  somewhat  the  same  proportion  between 
debts  for  the  various  purposes.  The  debt  increase  by  periods  has 
been  somewhat  as  follows:  — 


DEBT  INCREASE  OF  WORLD  FROM  17 13    (TREATY  OF 
UTRECHT)  3 


Period 

Increase 

Per  annum 

$787,200,000 

1,569,600,000 

4,987,200,000 

417,600,000 

10,272,000,000 

10,771,200,000 

12,432,000,000 

$15,840,000 
52,320,000 

216,960,000 
12,960,000 

1704—1816     

1817-1848 

467,040,000 
566,880,000 
540,521,739 

jgjj-jSSg 

$41,236,800,000 

$207,220,100 

^  Dudley  Baxter  has  called  attention  to  the  fact  that  the  large  debt  of  Holland  in 
the  eighteenth  century  compared  with  her  resources  led  to  the  loss  of  her  commerce 
and  political  power.  National  Debts  (1871),  pp.  42  and  95-96. 

2  Mulhall  (1899),  p.  260. 

'  Ihid.  Mulhall's  figures  for  the  increase  by  periods  are  given  in  millions  of 
pounds  only.  The  figures,  therefore,  are  merely  approximate.  See  also  our  table 
"  PubUc  Debt." 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    29 


As  Baxter  remarks,  —  treating  of  a  period  subsequent  to  the 
Napoleonic  Wars,  which  so  greatly  increased  the  debt  of  Great 
Britain,  —  the  rate  of  increase  in  debts  was  very  different  before 
and  after  i860.  Up  to  i860  national  borrowing  was  chiefly  in 
Europe.  The  revolutions  of  1848,  the  Crimean  War  of  1854,  and 
the  French- Austrian  War  of  1859  caused  most  of  the  increases  in 
debts.  After  i860  there  was  the  American  Civil  War,  the  Prussian- 
Austrian  War  of  1866,  and  the  Franco-Prussian  War  of  1870. 
Immense  loans  were  made  in  America  and  in  Europe.  There  took 
place  what  might  be  called  an  epidemic  of  borrowing.  The  average 
annual  total  loans  were  about  as  follows:  1848-54,  $96,000,000  a 
year;  1855-60,  $240,000,000  a  year;  1861-73,  $960,000,000  a  year;  ^ 
1874-1912,  $500,900,000  a  year.  It  is  to  be  remembered  that  a  con- 
siderable portion  of  the  debts  in  the  later  periods  were  for  produc- 
tive purposes  such  as  railroads.  The  public  debts  of  the  countries 
under  special  consideration  in  this  chapter  in  1900,  at  the  end  of  a 
long  period  of  peace,  compared  with  the  debts  in  191 2,  were  sub- 
stantially as  follows: 


PUBLIC  DEBTS  IN   19002  AND    191 2 


United  States . .  . . 
United  Kingdom . 

France 

German  Empire . 

Prussia 

Austria 

Hungary 

Russia 

Italy 

Japan 


Total  debt 


Debt 
per  capita 


$1,402,638,072 
3,019,098,154 
5,193,834.520 

569,062,987 
1,582,003,200 
1,720,502,400 

886,080,000 
3,148,800,000 
2,812,800,000 

2s3.934.400 


$18.12 
73.80 

135-36 
10. 10 
45.00 
66.46 
46.56 
24.48 
86.40 
5 -So 


Total  debt 


$1,026,686,026 
3,479,070,854 
6,343,622,400 
1,165,166,400 
2,225,214,264* 
2,494,228,800 
1,318.569,600 
4.538.654,400 
2,578,435.200 
1,251,316,800 


Debt 
per  capita 


$  10.76 
76.19 
159-95 
17.62 
55 -40* 
86.02 
62.08 
27.03 
73-61 
23.92 


•  Population  December  i,  igio  {Statistical  Abstract  for  Foreign  Countries,  p. 
ches  Jahrbuch  [Berlin,  1913],  p.  346). 


Debt  1 91 2  (Slatistis- 


These  figures  show  fairly  recent  changes  in  the  debts  of  the  vari- 
ous countries  under  special  consideration. 

The  debt  charges  have  not  always  varied  in  direct  proportion  to 
the  size  of  the  debts  themselves.  This  is  owing  prin-   changes  in 
cipally  to  a  change  in  the  rate  of  interest.  There  have   '^^^^  '^^^''ses 

^  Journal  of  the  Royal  Statistical  Society,  March,  1874,  pp.  2-3. 
*  Encyclopadia  Britannica  (nth  ed.,  1911),  vol.  xrx,  p.  269. 


30        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

been  many  conversions,  especially  in  English  and  American  debt 
history  and  some  forced  reductions  in  interest,  as  in  the  cases  of 
France  in  early  times,  Austria,  and  other  countries.  We  will  take 
up  this  question  when  dealing  with  the  debt  histories  of  the  sepa- 
rate countries. 

We  have  outlined  the  relations  between  the  population,  re- 
sources, and  debts  of  the  leading  civilized  nations  of  the  world. 
We  will  take  up  now  their  debt  history  or  record  of 

Debt  history  i  r    •  i      ttti         •     • 

good  or  bad  faith.  When  it  is  remembered  that  there 
is  no  legal  method  of  collecting  a  national  debt  or  the  interest  on 
it  against  the  will  of  the  nation  indebted,  the  importance  of  a 
nation's  record  becomes  apparent. 

Of  the  nations  under  special  consideration,  the  debt  history 
which  goes  back  the  farthest  is  that  of  France.  Although  there  are 
records  of  earlier  royal  borrowings,  the  foundation  of 
the  French  national  debt  was  laid  early  in  the  fif- 
teenth century.^  Later  Francis  I  (1515-47)  obtained  various  sums 
through  the  city  of  Paris,  which  kept  a  list  of  the  creditors  and 
distributed  the  interest.^  Part  of  this  money  he  borrowed  for  his 
ransom.  An  extensive  revision  of  the  debt  was  carried  out  by  Sully 
in  1604.  Other  attempts  were  made  by  Mazarin  and  Colbert.^ 

Throughout  French  debt  history,  owing  partly  to  the  various 
forced  reductions  and  conversions,  particularly  in  early  days,  and 
partly  owing  to  lack  of  clearness  in  the  records,  the  facts  are  very 
difficult  to  estabhsh.  Viihrer  has  described  the  history  of  the  vari- 
ous French  loans  previous  to  the  nineteenth  century  as  "a  history 
of  bankruptcies."  ^  All  forms  of  loans  were  tried  and  all  possible 
methods  of  evasion  were  used  to  escape  payment.  There  were 
forced  reductions  and  debasements  of  the  currency.  To  costly 
wars  and  internal  disturbances  was  added  ignorance  of  financial 
and  economic  conditions. 

Louis  XIV  spent  great  sums  in  war  and  in  building  Versailles. 
In  this  reign,  the  interest  on  the  debt  was  reduced  to  4%.^  At  the 

^  Encyclopcedla  Britannica  (nth  ed.,  1910),  vol.  x,  p.  794. 
2  C.  F.  Bastable,  Public  Finance  (1895),  p.  576. 

*  Encyclopedia  Britannica  (nth  ed.,  1910),  vol.  x,  p.  794,  and  Bastable,  Public 
Finance  (London,  1895),  p.  596.  *  Vuhrcr,  vol.  i,  p.  220. 

*  Leone  Levi,  Journal  of  the  Royal  Statistical  Society  (London,  1862),  vol.  xxv, 
p.  322;  Mulhall  (1899),  p.  264. 


UNITED  STATES  AND  FOREIGN  INVESTMENT  BONDS    3 1 

death  of  Louis  XIV,  in  1715,  the  capital  of  the  debt  amounted  to 
about  $595,200,000.  This  was  arbitrarily  reduced  by  the  Regent  in 
1716  to  about  $384,000,000.^  The  debt  increased  with  John  Law's 
State  Bank  and  through  his  schemes  for  the  creation  of  paper 
money.  In  1 72 1 ,  by  a  series  of  measures  both  violent  and  arbitrary, 
the  debt  was  reduced  by  half.  In  1764,  the  Comptroller-General 
de  Laverdy  "so  reduced  the  capital  of  the  debt  as  to  cause  a  new 
bankruptcy."  ^  After  this  reduction,  the  debt  amounted  to  $460,- 
200,000  and  the  annual  charge  to  $18,135,000.^  In  1784,  a  sinking 
fund  was  established,  but  soon  after  was  suppressed. 

During  the  convention  and  revolutionary  periods,  "the  famous 
assignats  and  all  kinds  of  government  papers  were  issued  of  fabu- 
lous amounts  and  utterly  worthless."  ^  The  public  debt  was  consoli- 
dated in  August,  1793.  The  use  of  paper  money  and  forced  loans, 
however,  destroyed  any  benefit  that  might  have  been  obtained.^ 
In  1798,  Napoleon  introduced  a  proper  system  of  finances,  but  did 
not  recognize  the  debt  incurred  during  the  Revolution.  All  per- 
petual and  life  annuities,  old  and  new,  were  changed  for  two  thirds 
of  the  amount  into  notes  called  dette  puUique  mohilisee  —  exchange- 
able for  land  —  and  one  third  was  entered  in  the  Grand-Livre 
under  the  title  of  tiers  consolide.  The  two  thirds  exchangeable  only 
for  land  soon  lost  all  value  and  the  one  third  became  the  origin  of 
the  present  national  debt  of  France.^  After  some  reductions  for 
confiscations,  the  balance  in  annual  interest  was  ascertained  to  be 
about  $7,680,000,  representing  a  capital  debt  of  about  $153,600,- 
000.  As  illustrating  French  credit  at  this  time,  a  price  of  seven 
francs  per  cent  for  the  5%  rentes  is  interesting.'  The  financial 
administration  of  Napoleon  I  had  two  great  merits  —  (i)  it  refused 
to  issue  inconvertible  paper  money,  and  (2)  it  refused  to  meet  war 
expenditure  to  any  large  extent  by  borrowing.^  It  made  up  the 
deficiency  by  levying  contributions  on  other  nations.  The  debt  at 
the  close  of  the  First  Empire,  including  floating  debt  of  about 
$96,000,000,  amounted  to,  say,  $339,096,000.^ 

*  R.  Dudley  Baxter,  National  Debts  (London,  1871),  p.  49. 

'  Levi,  vol.  XXV,  p.  322.  '  Bastable  (1895),  p.  597. 

*  Levi,  vol.  XXV,  p.  322.  *  Bastable  (1895),  p.  597. 

'  Levi,  vol.  XXV,  p.  322.  See  also  loth  Census  of  the  United  States,  vol.  vn,  p.  269. 
Bastable  (1895),  p.  597, 

'  Anmiaire  Statistique  (191 2),  p.  74*.  8  Bastable  (1895),  pp.  597-98. 

'  Baxter,  National  Debts  (1871),  p.  50. 


32       AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

The  Government  of  the  Restoration  was  obliged  (i)  to  meet  the 
war  indemnity  levied  on  France  by  the  Allies;  (2)  to  compensate 
the  emigres  or  dispossessed  proprietors;  and  (3)  to  take  up  the  bal- 
ance of  the  imperial  outlay  or  deficits.  These  problems  were 
handled  with  honesty  and  firmness.  The  Government  refused  to 
repudiate.  To  meet  these  expenditures,  the  Government  between 
181 5  and  1830  made  a  net  increase  in  interest  on  the  debt  of  about 
$19,200,000,  representing  a  net  capital  increase  of  about  $432,000,- 
000.^  It  was  in  1825  that  the  3%  rentes  were  created."^  The  French 
debt  in  1830  is  given  by  Baxter  as  amounting  to  about  $680,- 
496,000.^ 

The  Orleanist  Government  began  its  career  by  borrowing.  It 
created  loans  to  clear  off  deficits,  to  prepare  for  war,  and  to  carry 
out  public  works.  During  this  period,  however,  the  redemption  of 
the  debt  was  carried  on.  These  were  years  of  profound  peace,  dur- 
ing which  the  public  credit  stood  high.*  The  debt  in  February, 
1848,  according  to  Baxter,  amounted  to  about  $873,600,000.^  The 
price'of  the  5%  rentes  in  1844  reached  126.30.® 

The  Second  Republic  added  about  $10,176,000  to  the  interest 
charge,  and  brought  the  total  charge  up  to  nearly  $44,160,000  a 
year.  This  was  a  time  of  hazardous  experiments  on  the  part  of  the 
provisional  government  and  of  complete  disorganization  of  the 
financial  system.^  During  this  period,  there  were  forced  "con- 
versions" or  arbitrary  reductions  of  interest.^  By  loans,  consolida- 
tions, and  an  indemnity  for  the  emancipation  of  slaves,  the  Second 
Repubhc  raised  the  capital  of  the  debt  to  about  $1,177,200,000.^ 
In  1848,  both  the  5%  and  the  3%  rentes  sold  at  the  lowest  prices 
since  the  close  of  the  Napoleonic  wars.  The  5%  rentes  were  quoted 
at  50  and  the  3%  rentes  at  32^.^'' 

Under  Napoleon  III,  even  from  the  time  of  his  presidency, 
"debts  were  accumulated  as  never  previously."    The  apparent 

1  Bastable  (1895),  pp.  598-99.   Baxter  (187 1),  p.  51. 

*  Annuaire  Statistique  (191 2),  p.  74*. 

'  Baxter  (1871),  p.  51.  (In  all  Baxter's  figures  of  the  French  debt  after  1798,  the 
sinking  fund  is  excluded,  but  the  caution  money  and  floating  debt  are  included.) 

*  Bastable  (1895),  p.  599.  ^  Baxter  (1S71),  p.  51. 

^  Annuaire  Slalistique  (1912),  p.  74*.  '  Bastable  (1895),  p.  599. 

8  Francis  W.  Hirst,  The  Credit  oj  Nations  (National  Monetary  Commission, 
Washington,  1910),  p.  84. 
•    '  Baxter  (1871),  p.  51.  "  Annuaire  Statistique  (1912),  p.  74*. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    33 

decrease  between  1866  and  1868  was  fictitious  —  caused  by  manip- 
ulating the  accounts.^  Through  continued  deficits  and  the  Cri- 
mean, Italian,  and  other  wars,  France  again  heavily  increased  its 
debt.^  The  total  cost  of  the  Crimean  War  to  France  was  about 
$316,800,000,  of  which  about  $295,200,000  was  added  to  the  debt. 
Further  loans  were  issued  much  under  par  for  the  Italian  War  and 
the  Mexican  Expedition.  The  total  addition  to  the  debt  between 
1852  and  July,  1870,  was  represented  by  an  interest  charge  of  about 
$24,768,000.  The  total  annual  payment  had  risen  to  about 
$69,120,000  and  the  capital  to  a  little  less  than  $2,304,000,000. 

The  Franco-Prussian  War  was  as  marked  in  French  debt  history 
as  the  war  with  Napoleon  I  in  the  case  of  the  English  debt.  In 
addition  to  the  expenses  of  carrying  on  the  war,  there  was  an  in- 
demnity of  about  $960,000,000.  The  total  expense  of  the  war  has 
been  estimated  at  about  $1,886,400,000,  of  which  about  $1,632,- 
000,000  was  raised  through  loans. ^  As  showing  the  effect  of  the 
Franco-Prussian  War  on  the  credit  of  France,  it  is  interesting  to 
note  that  the  3%  rentes  sold  in  1870  at  a  high  price  of  75.10  and 
in  187 1  at  a  low  price  of  50.35.^ 

After  the  war,  there  were  fresh  loans  for  public  works  and  to 
meet  budget  deficits.  There  had  been  in  1862  a  conversion  of  the 
debt  which  had  reduced  the  interest,  but  had  increased  the  capital 
by  about  $307,200,000.   There  were  also  conversions  in  1883  and 

1894.5 

The  French  debt  in  191 2  was  the  largest  in  the  world  and  nearly 
twice  that  of  Great  Britain  and  Ireland.  The  "falling-in"  of  the 
railway  property,  referred  to  earlier  in  this  chapter,  will  lessen 
considerably  the  burden  of  the  debt.  Baxter  in  1871  estimated  the 
French  debt  charge,^  compared  with  the  national  income  for  differ- 
ent periods,  as  follows:  1818,  3.5%;  1837,  2.3%;  1870  (before  the 
Franco-Prussian  War),  2.3%;  after  the  war,  about  5%.^  These 
percentages  compare  with  our  figure  of  4.07%  in  1912. 

^  Tenth  Census,  vol.  vii,  p.  270.  ^  Baxter  (1871),  p.  51. 

'  Bastable  (1895),  p.  600.  *  Annuaire  Slatistique  (1912),  p.  75*. 

^  Bastable  (1895),  pp.  600-01.  There  was  a  successful  conversion  in  1852  by  which 
a  large  amount  of  5  per  cents  were  converted  into  4§%  stock  with  a  considerable 
saving  in  interest  to  the  State.  (Hirst,  Credit  of  Nations,  p.  93.) 

^  The  French  debt  charge  for  1870  includes  railway  guarantees  and  the  bridge  and 
canal  fimd.   (Baxter  [1S71],  p.  53.) 

'  Baxter  (1S71),  pp.  55-57. 


34        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

After  France,  the  debt  history  of  England  or  of  the  United 
Kingdom  is  older  than  that  of  any  other  country  under  special 
consideration.  In  1672,  the  Exchequer  was  closed  by 
Charles  II,  and  about  $6,376,924,  which  had  been 
advanced  on  the  credit  of  supplies  voted  by  the  House  of  Com- 
mons, was  seized.  Later  this  so-called  "bankers"  debt  was  con- 
solidated with  other  debts  and  interest  paid  at  the  rate  of  6%.^ 

The  British  debt  began  in  earnest  after  the  Revolution  of  1688 
and  with  the  wars  of  William  III  against  France.^  The  principal  of 
the  debt  at  the  time  of  the  Revolution  has  been  given  as  about 
$3,188,462.^  The  first  loan  raised  by  William  III  was  for  four  years, 
with  interest  partly  at  7%  and  partly  at  8%,  and  was  a  charge  on 
certain  excise  duties.'*  The  debt  at  the  Peace  of  Ryswick  (1697), 
exclusive  of  annuities,  amounted  to  about  $103,275,562.  During 
the  five  years  of  peace  which  succeeded,  nearly  one  quarter  of  the 
debt  was  paid  off  .^ 

In  171 1,  there  was  established  the  celebrated  South  Sea  Com- 
pany, which  has  a  curious  connection  with  the  history  of  the 
English  debt.  This  company  was  formed  to  assist  the  Government 
in  its  financial  operations.  On  government  obligations  amounting 
to  about  $43,200,000,  little  or  no  interest  had  been  paid.  The  secu- 
rities were  greatly  depreciated.  The  South  Sea  Company  was  em- 
powered to  receive  these  obligations  as  subscriptions  for  its  stock. 
The  amount  of  the  stock  thus  created  was  about  $44,054,246, 
which  in  17 15  was  increased  to  about  $48,000,000  by  the  addi- 
tion of  certain  arrears  of  interest.^  The  wars  of  Marlborough 
under  Queen  Arme  raised  the  debt  at  the  time  of  the  Peace  of 
Utrecht,  in  17 13,  exclusive  of  interest  and  annuities,  to  about 
$250,297,742.^  During  this  reign,  the  system  of  raising  money  by 

^  Robert  Hamilton,  An  Inquiry  concerning  The  Rise,  Progress,  Redemption,  Present 
State,  and  Management,  of  the  National  Debt  of  Great  Britain  ajid  Ireland  (3d  ed.,  en- 
larged, Edinburgh,  1818).  (In  Samuel  Jones  Loyd,  Select  Collection  of  Scarce  and 
Valuable  Tracts  atid  Other  Publications  on  the  National  Debt  and  The  Sitiking  Fund, 
[London,  1857],  p.  474.) 

2  Baxter  (i87i),pp.  7-8. 

^  Hamilton,  p.  499. 

«  Ibid.,  p.  475. 

*  Ibid.,  p.  499. 

8  Ibid.,  p.  478,  and  Fenn's  Compendium  of  the  English  and  Foreign  Funds  (gth 
ed.,  London,  1867),  p.  2. 

^  Hamilton,  p.  500. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    35 

mortgaging  particular  branches  of  the  revenue  was  continued. 
Large  amounts  also  were  raised  by  annuities  and  by  means  of  lot- 
teries. The  debt  created  was  considerably  larger  than  the  amount 
of  money  received.^ 

The  reign  of  George  I  marked  an  important  recovery  of  national 
credit,  owing  to  the  conditions  of  peace  and  to  economy.  In  17 16, 
there  was  established  the  first  sinking  fund,  usually  called  after  Sir 
Robert  Walpole.  In  171 7,  after  negotiations  with  the  Bank  of  Eng- 
land and  the  South  Sea  Company,  a  general  reduction  in  interest 
on  the  public  debt  to  5%  was  agreed  upon.  Ten  years  later,  in 
1727,  the  Government  arranged  to  reduce  from  5%  to  4%  the 
interest  on  its  debt  to  the  Bank  and  to  the  South  Sea  Company; 
and  in  1732,  the  Government  made  a  similar  arrangement  with  the 
East  India  Company.  The  irredeemable  annuities  also  were  con- 
verted into  redeemable  debt,  and  a  reduction  of  interest  to  4%  was 
agreed  upon  for  this  new  capital.  At  the  end  of  the  reign  of  George 
I,  the  total  debt,  funded  and  unfunded,  was  estimated  at  about 
$249,600,000  and  the  charge  for  interest  at  about  $5,844,245.^ 

During  the  first  part  of  the  reign  of  George  II  (1727-60),  under 
the  wise  administration  of  Walpole,  peace  and  financial  progress 
continued.  In  1739,  however,  there  began  a  long  war,  first  with 
Spain  and  afterwards  with  France  and  Spain  together,  which  even- 
tually added  some  $144,000,000  to  the  national  debt.  Even  under 
these  conditions  the  Government  was  able  to  borrow  at  from  3% 
to  4%.  In  1749,  a  law  was  passed  providing  for  an  important  con- 
version of  the  pubHc  debt.  All  the  public  creditors  who  had  been 
receiving  interest  at  the  rate  of  4%  were  to  have  the  rate  reduced 
after  December  25,  1750,  to  z\%,  until  December,  1757,  and  after 
that  date  to  3%.  Most  of  the  creditors  ultimately  accepted  this 
offer,  and  those  who  refused  were  paid  off.  Debts  originally  con- 
tracted at  3%  were  united  in  another  fund  called  the  3%  consoli- 
dated annuities.  This  latter  operation  was  the  origin  of  the  3% 
consols.  It  is  a  startling  fact  that  British  credit  at  this  time  stood 
as  high  as  it  did  in  1910-12.^ 

The  debt  in  1756,  at  the  beginning  of  the  Seven  Years'  War, 

^  Hirst,  The  Credit  of  Nations,  pp.  15-16. 

2  Ibid.,  pp.  16-17.   For  an  account  of  Sir  Robert  Walpole's  Sinking  Fund,  see 
Hamilton,  pp.  526-30. 
'  Ibid.,  pp.  17-18. 


36        AMERICAN  AND  FOREIGN  INVESTiMENT  BONDS 

exclusive  of  interest  and  annuities,  was  about  $356,794,334.* 
About  $288,000,000  was  added  to  the  debt  by  the  Seven  Years' 
War,  which  was  far  more  costly  than  its  predecessors;  and  3  per 
cents  fell  far  below  par.-  The  principal  of  the  debt  at  the  Peace  of 
Paris  in  1763  was  about  $666,554,064.  After  a  considerable  reduc- 
tion during  the  years  of  peace,  the  debt  stood  at  the  beginning  of 
the  American  War,  in  1775,  at  about  $617,201,448  of  principal  and 
about  $21,463,541  of  interest  and  annuities.^  By  this  time  it  was 
clear  that  the  national  debt  was  growing  at  a  dangerous  rate;  and 
it  had  all  been  spent  on  war.  From  a  financial  point  of  view,  how- 
ever, the  war  with  the  American  colonies  proved  more  disastrous 
than  any  of  its  predecessors.  This  was  partly  owing  to  the  mis- 
management of  the  finances.  In  178 1,  a  funding  operation  was  put 
through  by  which  about  $100,800,000  was  added  to  the  capital  of 
the  debt  and  only  about  $57,600,000  reached  the  Exchequer.  The 
credit  of  the  country  went  from  bad  to  worse.  In  August,  1774, 
before  the  beginning  of  the  American  Revolution,  3%  consols  had 
stood  at  89.  They  had  fallen  more  or  less  steadily  during  the  war, 
until  at  the  surrender  of  Lord  Cornwallis  they  were  quoted  at  54.* 
The  debt  at  the  Peace  of  Versailles  in  1783,  which  ended  the  Ameri- 
can War,  stood  at  about  $1,199,287,814  of  principal  and  about 
$45,368,506  of  interest  and  annuities. 

At  the  beginning  of  the  French  Revolutionary  wars  in  1793,  the 
principal  of  the  British  debt,  according  to  Hamilton,  stood  at 
about  $1,171,769,448.^  In  September,  1815,  —  before  the  Peace  of 
Paris  which  closed  the  Napoleonic  wars,  —  the  principal  of  the 
debt,  including  apparently  floating  or  unfunded  debt,  amounted 
to  the  enormous  sum  of  $4,132,987,435,  and  interest  and  annuities 
to  $156,698,966,  or  a  total,  funded  and  unfunded  debt,  of  about 
$4,289,686,401.'^  In  the  opinion  of  Professor  Levi,  England  would 
have  done  better  to  have  fought  the  Napoleonic  wars  more  with 
taxes  and  less  with  borrowings.^  A  large  part  of  this  debt  had  been 
contracted  at  "ruinous  rates."  Between  1793  and  1815,  on  an 
average  $830.40  of  stock  was  created  for  every  $480  of  money 
obtained,  so  that  the  country  really  received  only  $1,627,831,200, 

*  Hamilton,  p.  500.  ^  Hirst,  p.  i8.  ^  Hamilton,  p.  500. 

*  Hirst,  pp.  19-20.  ^  Hamilton,  p.  500. 

6  Fcnn  (1867),  p.  6.  '  Levi  (1862),  p.  314. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS  37 

or  $1,188,316,766  less  than  it  engaged  to  pay.^  Between  1800 
and  1 8 10,  taxation  amounted  to  nearly  25%  of  the  estimated  na- 
tional income.^  In  1816,  the  charge  for  interest  was  more  than  half 
of  the  whole  public  revenue  from  taxes.  The  national  credit  was 
much  impaired.  During  the  French  wars,  the  price  of  3%  consols 
fluctuated  between  a  maximum  of  73  and  a  minimum  of  47.^  In 
June,  181 5,  the  month  of  Waterloo,  the  lowest  price  reached  for 
consols  was  53! .^ 

After  Waterloo,  the  condition  of  Great  Britain  was  very  bad  and 
the  financial  recovery  slow.  In  1822,  Vansittart  introduced  a 
scheme  which  led  to  the  conversion  of  the  5  per  cents  with  a  large 
saving  of  interest  and  which  also  provided  for  the  establishment  of 
a  real  sinking  fund.  This  was  created  through  making  provisions 
for  net  surpluses  in  the  revenue  and  applying  the  same  to  the  reduc- 
tion of  the  debt  —  the  only  sort  of  national  sinking  fund  which 
means  anything.^  Between  1823  and  1832,  consols  fluctuated  be- 
tween 72  for  the  lowest  and  97  for  the  highest.®  The  amount  of  the 
debt  in  1854  as  given  by  Baxter  was  about  $3,842,400,000,  a  con- 
siderable reduction  from  the  debt  at  the  close  of  the  Napoleonic 
wars.  The  Crimean  War  which  lasted  about  two  years  (1854-56) 
raised  the  debt,  including  annuities,  to  about  $4,003,200,000.''  The 
low  point  for  consols  during  this  period  was  85I  in  March,  1854.^ 

In  the  next  twenty-one  years,  about  $336,000,000  of  debt  were 
extinguished;  and  in  the  twenty  years  after  1877,  the  reduction 
amounted  to  about  $590,400,000.^  These  relatively  large  reduc- 
tions of  debt,  combined  with  generally  favorable  financial  condi- 
tions, led  to  the  record  high  price  for  British  consols  on  July  i, 
1896.  At  this  time,  as  2|  per  cents,  they  sold  at  114,  or  on  an  in- 
come basis  of  about  1.95%.^*^  In  1899,  the  debt  stood  at  about 
$3,048,000,000.^^ 

From  this  figure  in  1899,  the  lowest  point  in  the  British  debt 

*  Levi  (1862),  pp.  315-16.  2  7jj^.^  p.  3ig.  3  Hirst,  p.  21. 

*  Messrs.  Frederic  C.  Mathieson  &  Sons,  London,  England;  enclosed  in  letter 
dated  April  29,  19 13. 

^  Hirst,  p.  21.  8  Mathieson  letter  dated  April  29,  1913. 

^  Baxter  (1871),  p.  9.  8  Mathieson  letter  dated  April  29,  1913. 

'  Hirst,  p.  22. 

*°  Figures  from  F.  C.  Mathieson  &  Sons.  This  yield  is  allowing  for  loss,  if  redeemed 
at  due  date  (1923)  at  par,  and  for  a  reduction  of  interest  in  1903. 
^^  Hirst,  p.  22. 


38        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

since  the  Napoleonic  wars,  the  national  debt  rose  in  consequence 
of  the  Boer  War  to  $3,374,400,000  in  1901  and  to  $3,830,400,000  in 
1903.  This  was  the  largest  debt  since  1867,  "so  that  the  national 
savings  of  thirty-six  years  of  peace  were  swept  away  by  national 
borrowings  during  three  years  of  war."  ^  In  the  opinion  of  Mr. 
Hirst,  editor  of  the  "London  Economist,"  more  immediate  injury 
was  done  to  British  credit  by  the  financial  policy  which  preceded 
the  war  than  by  the  actual  outbreak  and  carrying  on  of  the  war. 
The  increasing  expenditure  before  the  war,  the  mismanagement  of 
the  sinking  fund,  and  the  apprehension  of  trouble  in  South  Africa 
led  to  a  greater  fall  in  consols  than  did  the  actual  outbreak  and 
progress  of  the  war.^  Between  March  31,  1906,  and  March  31, 
1909,  with  Mr.  Asquith  as  Chancellor  of  the  Exchequer,  the  na- 
tional liabilities  were  reduced  by  about  $201,600,000.^  In  spite  of 
this  fact  and  owing  probably  to  general  financial  conditions,  the 
price  of  consols  continued  to  sink  until  they  reached  a  figure  of 
72I  on  October  14,  1912.^ 

Baxter  has  estimated  the  percentage  ^  of  debt  charge  to  national 
income  of  Great  Britain  and  Ireland  at  different  dates  as  follows: 
1700,  2.3%;  1712,  4.5%;  1736,  2.3%;  1784,  6.2%;  1815,  9%;  1843, 
5.5%;  1870,  2.8%.  These  compare  with  our  figure  of  1.09%  in 
1912. 

As  Professor  Bastable  remarks,  the  growth  of  the  English  debt 
has  been  due  altogether  to  war  expenditure.  It  is  all  what  may  be 
called  a  "dead-weight"  or  unproductive  debt.^  Writing  in  1895, 
Professor  Bastable  considered  that  the  reduction  in  the  English 
debt  during  years  of  peace  had  been  far  from  satisfactory.  He  held 
that  the  continued  existence  of  such  a  big  debt  must  be  attributed 
largely  to  financial  weakness.^  At  the  same  time,  while  the  British 
debt  up  to  191 2  had  not  been  reduced  to  the  extent  that  it  might 
have  been,  the  burden  of  the  debt,  owing  to  reductions  in  interest 

^  Hirst,  pp.  24-25.  2  il)icl,^  pp.  23-24. 

'  Ibid.,  p.  25.  (For  the  various  conversions  of  the  English  debt  and  for  the  history 
of  the  sinking  fund,  see  Hirst,  pp.  26-39.) 

*  Figures  from  F.  C.  Mathieson  &  Sons. 

^  In  estimating  the  debt  charges  from  1 784-1870,  Baxter  has  deducted  the  amounts 
estimated  as  paid  for  reduction  of  capital.   (Baxter,  National  Debts,  p.  18.) 

*  With  the  exception  of  "Other  Liabilities,"  which  represent  mostly  productive 
objects.   {Statesman's  Year-Book  [London,  1913],  p.  49.) 

'  Bastable  (1895),  p.  594. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    39 

and  to  the  great  increases  in  national  wealth  and  national  income, 
was  becoming  steadily  less.  The  great  European  War  will  add  a 
new  and  extremely  interesting  chapter.^ 

If  we  follow  the  historical  order,  the  debt  of  Austria  probably 
should  be  considered  next.  The  financial  and  debt  history  of  Aus- 
tria is  far  from  pleasant  reading.  From  the  latter  part 
of  the  eighteenth  century  until  the  latter  part  of  the 
nineteenth  century  (say,  1 789-1 870),  there  was  not  a  year  in  which 
the  revenue  of  the  State  equaled  its  expenditure.  In  1763,  at  the 
end  of  the  Seven  Years'  War,  the  capital  of  the  debt,  according  to 
Baxter,  was  about  $72,000,000.  In  1789,  it  had  increased  to  about 
$168,000,000.  During  the  disastrous  wars  of  the  French  Revolution 
and  of  the  First  Empire,  the  debt  increased  rapidly.  Inconvertible 
bank-notes  were  issued  on  a  large  scale.^  From  1799,  the  bank-bills 
fell  lower  and  lower  until  they  sank  to  about  one  seventeenth  of 
their  normal  value.  An  imperial  mandate  of  February,  181 1,  con- 
tained these  words:  "I  give  my  imperial  word  that  the  bank-bills 
shall  never  be  reduced  in  value."  ^  March  26,  six  weeks  later,  the 
Government  reduced  the  value  of  the  paper  money,  which  had 
increased  to  $515,849,000,  to  one  fifth  of  its  previous  amount.  By 
this  process  the  paper  money  was  reduced  to  $103,169,800.  This 
was  increased  again  in  1816  to  $310,969,350.  The  new  paper 
money  soon  fell  to  one  quarter  of  its  nominal  value  —  thereby 
making  the  total  loss  nineteen  twentieths.  The  owner  of  what 
had  been  originally  $48.67  really  possessed  but  the  value  of  $2.40.^ 

The  total  Austrian  debt  in  1811  was  about  $392,570,822.  The 
wars  of  1813  to  1815  required  fresh  sacrifices.  There  was  also  ex- 
travagance on  the  part  of  the  Government.  In  order  to  get  rid  of  a 
burdensome  floating  debt,  new  operations  were  begun  in  1816 
nearly  equal  to  a  second  bankruptcy.  The  owners  of  paper  money 
were  given  the  option  (i)  of  exchanging  it  for  two  sevenths  of  its 
value  in  bank-notes  and  accepting  State  paper  at  1%  for  the  re- 
maining five  sevenths;  or  (2)  of  exchanging  the  paper  money  for 

'  For  detailed  official  history  of  the  British  national  debt  see :  National  Debt  History 
of  the  Early  Years  of  the  Funded  Debt  from  i6g4  to  1786  (London,  1898);  National  Debt; 
the  report  by  the  Secretary  and  Comptroller-General  of  the  Proceedings  of  the  Com- 
missioners for  the  reduction  of  the  national  debt  from  1786  to  31st  March,  1890 
(London,  1891). 

^  Baxter  (1871),  p.  65.        ^  Tenth  Census,  vol.  vn,  p.  275.  *  Ibid. 


40        AIMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

shares  in  the  newly  estabhshed  "National  Bank."^  In  1820, 
according  to  Baxter,  the  debt  amounted  to  about  $473,760,000.^ 
Between  1820  and  1840,  loans  followed  one  another  rapidly  —  in- 
cluding lottery  loans.  The  Metternich  system,  adopted  from  181 1 
to  1840,  increased  the  debt  so  that  the  annual  interest  rose  from 
$3,747,205  to  $19,806,665.  After  the  pressing  financial  embarrass- 
ments in  1846  and  1847,  the  Revolution  followed  in  Vienna,  Hun- 
gary, and  Italy  in  1848.  Paper  money  again  was  issued  to  an  enor- 
mous extent.^  Baxter  speaks  of  the  successive  deficits  as  having 
brought  the  debt  in  1848  to  about  $600,000,000.'* 

The  wars  with  Hungary,  Italy,  France,  and  Prussia  and  the 
large  military  establishments  in  the  intervals  caused  an  enormous 
increase  in  the  Austrian  debt,  and  raised  it  in  1868  to  about  $1 ,444,- 
800,000.^  Writing  a  few  years  earlier.  Professor  Leone  Levi  spoke 
of  the  financial  condition  of  Austria  for  a  long  series  of  years  as 
"  ruinous  in  the  extreme."  ^ 

At  one  time  the  Government  unfairly  reduced  the  interest  on  the 
debt  to  one  half  its  original  percentage,  and  then  forced  creditors 
to  contract  a  further  loan  under  threat  of  loss  of  their  previous 
claim.^  Mulhall  gives  the  combined  debts  of  the  Austro-Hungarian 
Empire  in  1875  and  1889:  1875,  about  $1,948,800,000;  1889, 
$2,785,920,000.^ 

Comparatively  recent  large  additions  to  the  Austro-Hungarian 
debts  have  been  made  for  the  acquisition  of  state  railways  and  for 
public  works.^  Baxter  has  estimated  the  percentage  of  debt  charge 
to  national  income  for  Austria  at  different  periods  as  follows: 
1815-20,  1.8%;  1837-43,  2.2%;  1868-70,  2.2%.i'»  These  com- 
pare with  our  figure  in  1912  of  3.76%.  Since  the  beginning  of 
the  present  war,  Austria  has  refused  to  pay  interest  or  princi- 
pal of  notes  held  by  citizens  of  enemy  countries.  Later  on  in  this 
chapter,  we  give  highest  and  lowest  prices  of  Austrian  rentes  by 
ten-year  periods  from  1873  to  1912  inclusive. 

^  Tenth  Census,  vol.  vii,  p.  275.  ^  Baxter  (1871),  p.  65. 

3  Tenth  Census,  vol.  vii,  p.  275.  *  Baxter  (1871),  p.  65. 

»  Ibid. 

'  Journal  of  the  Royal  Statistical  Society  (1862),  vol.  xxv,  p.  327. 
^  Tenth  Census,  vol.  vii,  p.  275.  *  Mulhall  (1899),  p.  267. 

'  Hirst,  p.  9.   See  also  Encyclopedia  Britannica  (nth  ed.,  1910),  vol.  11,  p.  976; 
vol.  XIII,  pp.  899-900. 
"  Baxter,  pp.  89-92. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    4I 

The  debt  of  what  is  now  the  United  States  originated  during  the 
American  Revolution.^  In  July,  1776,  Silas  Deane,  political  and 
commercial  agent  for  the  United  States  in  France, 
met  Caron  de  Beaumarchais,  who  had  induced  the 
French  king  to  aid  the  American  colonies  —  perhaps  partly  in 
revenge  for  the  loss  of  the  great  French  Empire  in  America  in  the 
Seven  Years'  War.  Apparently  $195,000  had  been  advanced  by 
the  French  Treasury,  June  10,  1776.  Later,  Beaumarchais  ar- 
ranged, under  the  guise  of  an  ordinary  commercial  contract,  to 
furnish  the  colonies  with  arms,  ammunition  and  supplies.  This, 
with  the  early  domestic  loans  of  the  Continental  Congress  ^  and 
the  loans  of  the  separate  colonies  or  States  for  war  purposes,  was 
the  origin  of  our  national  debt.^ 

The  first  foreign  loan  negotiated  by  the  Continental  Congress 
was  obtained  in  1777  from  the  "farmers-general  of  France,"  a 
private  corporation  engaged  in  the  collection  of  the  national  reve- 
nue of  France.  Up  to  that  time  the  expenses  of  the  Revolutionary 
Government  in  Europe  had  been  met  by  small  subsidies  from 
France  and  Spain  and  by  such  remittances  in  specie  as  could  be 
spared  from  home.'*  From  1778  to  1782  various  sums  were  ad- 
vanced or  loaned  the  United  States  by  France.  A  contract  for  the 
repayment  of  these  sums  was  drawn  up  and  dated  July  16,  1782. 
The  total  amount  —  $3,510,000  —  was  to  bear  5%  interest  and  to 
be  repaid  in  twelve  annual  payments  of  about  $292,500  each,  be- 
ginning the  third  year  after  the  conclusion  of  peace.  The  arrears  of 
interest  to  the  date  of  the  contract  and  then  to  the  date  of  the 
treaty  of  peace  were  to  be  made  a  gift  by  France.^  Although  peace 
was  made  in  1783,  the  repayment  actually  began  in  1791,  and  was 
made  to   the  Revolutionary  Government  of  France.    The  last 

1  From  the  close  of  the  seventeenth  and  the  early  part  of  the  eighteenth  century 
until  the  time  of  the  Revolution,  Massachusetts,  South  Carolina,  New  York,  and 
other  colonies  had  outstanding  at  times  varying  amounts  of  so-called  bills  of  credit  or 
paper  money.  For  the  history  of  these  issues,  see  Horace  White,  Money  and  Banking 
(Boston,  1902),  pp.  103- 1 14. 

2  After  March  i,  1782,  interest  on  the  domestic  debt  was  not  met,  and  certificates 
of  interest  indebtedness,  receivable  for  taxes  by  the  States,  were  issued.  (Davis  R. 
Dewey,  Financial  History  of  the  United  States  [New  York,  1915],  p.  46.) 

'  Rafael  A.  Bayley,  The  National  Loans  of  the  United  States  from  July  4,  1776,  to 
June  JO,  1880.  Tenth  Census,  vol.  vn,  pp.  299-301.  Davis  R.  Dewey,  Financial  His- 
tory of  the  United  States  (New  York,  1915),  pp.  45-47. 

*  Tenth  Census,  vol.  vn,  p.  304.  ^  Ibid.,  p.  305. 


42        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

payment  was  made  in  1795,  at  which  time  the  small  balance  due 
was  converted  into  5^%  stock.  All  this  loan  was  repaid.^ 

The  financial  situation  of  the  Continental  Congress  was  at  its 
worst  in  1779  and  1780.  Over  $200,000,000  in  Continental  cur- 
rency had  been  issued  —  which  in  1780  "quietly  expired  in  the 
hands  of  its  possessors."  The  army  was  badly  in  need  of  food  and 
clothing.2  In  1781,  a  loan  of  $1,950,000  was  obtained  in  Holland 
on  the  credit  of  France.^  This  loan  was  provided  for  in  the  contract 
drawn  up  July  16,  1782,  —  signed  by  the  Comte  de  Vergennes  and 
Benjamin  Franklin.^  The  repayment  of  the  principal  of  this  loan 
was  begun  in  1792,  and  a  small  unpaid  remainder  ($176,000)  was 
converted  in  1795  into  4|%  stock.  Later  this  stock  was  redeemed.^ 
In  1783,  another  loan  was  obtained  from  France;  and  between  1782 
and  1794,  eleven  loans  were  raised  in  Holland  and  one  in  Antwerp 
(1791).  These  loans  were  all  repaid  in  full.^ 

On  assuming  the  position  of  Secretary  of  the  Treasury,  in  1789, 
Alexander  Hamilton  found  himself  temporarily  without  funds  to 
meet  the  ordinary  expenses  of  the  Government.  Under  these  cir- 
cumstances, he  decided  to  negotiate  temporary  loans  with  the  Bank 
of  New  York  and  the  Bank  of  North  America.  These  loans  were  all 
repaid  by  1790.^ 

The  indebtedness  of  the  United  States  at  the  organization  of  the 
present  form  of  government,  including  arrears  of  interest  to  Janu- 
ary I,  1790,  was:  — 

Principal  of  foreign  loans $10,098,706. 02  ^ 

Balance  due  France  for  military  supplies 24,332 .  86 

Arrears  of  interest  to  January  i,  1790 1,760,277. 08  * 

Debt  due  foreign  officers 186,988.  78  * 

Arrears  of  interest  to  January  i,  1790 11,219.32 

Principal  of  domestic  debt  (estimated) 28,858,180. 65 

Arrears  of  interest  to  January  i,  1790 11,398,621. 80 

Arrears  and  claims  against  the  late  government  outstanding  and 

subsequently  discharged 450,395.  52 

Total  debt  of  the  United  States  January  i,  1790 $52,788,722.03 

1  Tenth  Census,  vol.  vn,  p.  306.        ^  Ihid.  See  also  Dewey,  pp.  36-41. 

^  There  was  also  in  1781  a  small  loan  or  advance  of  moneys  from  Spain.  The 
Spanish  debt  —  $174,011  —  was  repaid  in  1792-93.   {Tenth  Census,  vol.  Vii,  p.  306.) 

^  Tenth  Census,  vol.  vii,  p.  307.  ^  Ibid.,  p.  308. 

^  Ibid.,  pp.  309-22.  "  Ibid.,  pp.  322-24. 

8  Not  only  had  the  United  States  been  delinquent  in  the  payment  of  interest  on  the 
foreign  loans  for  periods  varying  from  four  to  six  years,  but  it  had  failed  to  pay  the 
installments  of  principal  which  began  to  be  due  in  17S7.   (Dewey,  p.  89.) 

*  Part  of  the  amount  due  foreign  ofEcers  who  had  fought  in  the  Revolution  was 


UNITED  STATES  AND  FOREIGN   GOVERNMENT  BONDS    43 

To  this  total  should  be  added  the  debts  of  the  several  States  — 
estimated  by  Alexander  Hamilton  at  that  time  to  aggregate  about 
$25,000,000. 

There  were  two  kinds  of  debt  about  the  settlement  of  which  there 
was  no  dispute:  (i)  the  foreign  debt  loaned  in  gold  on  the  faith  of 
the  Continental  Congress;  and  (2)  paper  money  issued  by  Congress 
and  by  the  several  States.  The  foreign  debt  was  paid  in  full;  the 
paper  money  sank  to  no  value  and  passed  out  of  circulation.^ 

By  an  act  approved  August  4, 1790  (Acts  of  ist  Congress,  Session 
2,  chap,  xxxiv,  I  Stat.  L.,  p.  138),  provision  was  made  for  the 
payment  of  the  debt  of  the  United  States.  Section  2  of  this  act 
authorized  a  loan  of  not  over  $12,000,000,  to  be  applied  to  the  pay- 
ment of  principal  and  interest  of  the  foreign  debt.  Section  3  author- 
ized a  loan  to  the  full  amount  of  the  domestic  debt,  payable  in  certi- 
ficates issued  for  the  said  debt  according  to  their  specie  value  and 
computing  the  interest  upon  such  as  bore  interest  to  December  31, 
1790.^  Section  13  authorized  a  loan  of  $21,500,000  to  take  care  of 
the  debt  incurred  up  to  January  i,  1790,  by  the  respective  States 
for  the  expenses  of  the  war.  Section  21  pledged  the  faith  of  the 
United  States  to  make  good  any  deficiencies  in  income  necessary 
for  interest  on  the  debt,  and  section  2  2  provided  for  the  creation  of 
a  sinking  fund  from  the  proceeds  of  the  sales  of  western  lands. 

The  evidences  of  the  domestic  debt  and  of  the  debts  of  the  sev- 
eral States  were  taken  in  exchange  on  a  basis  which  resulted  as 
follows :  In  the  case  of  the  domestic  debt,  the  National  Government 
paid  the  interest  immediately,  on  two  thirds  of  the  principal  only, 
at  6%;  it  deferred  interest  on  the  remaining  one  third  for  ten  years; 
and  it  allowed  3%  interest  on  the  arrears  of  interest  —  making  up 
nearly  one  third  of  the  whole  debt.  In  assuming  the  debts  of  the 
various  States,  the  Government  paid  immediately  interest  at  6% 
on  four  ninths  of  the  entire  sum;  on  two  ninths  it  deferred  interest 
for  ten  years;  and  it  allowed  only  3%  on  three  ninths.^  The  amount 
of  State  debts  actually  assumed  was  $18,271,786.47.^ 

paid  in  cash  in  1782  and  part  in  6%  certificates  of  indebtedness.  By  1803  most  of 
these  certificates  had  been  redeemed  and  by  1828  all.  {Tenth  Census,  vol.  vn,  p.  322.) 

^  Tetith  Census,  vol.  vii,  p.  325. 

^  This  section  also  authorized  refunding  United  States  bills  of  credit  or  Continental 
currency  on  the  basis  of  $100  of  currency  to  $1  of  specie. 

'  Alexander  Hamilton,  Works  (1851),  vol.  rv,  pp.  251-52.  Dewey,  p.  95. 

*  Tenth  Census,  vol.  vu,  p.  327. 


44       AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

By  an  act  of  August  12,  1790  (Acts  of  ist  Congress,  Session  2, 
chap.  47,  I  Stat.  L.,  p.  186),  provision  was  made  for  reducing  the 
debt  by  purchase  at  market  price  —  not  exceeding  par  or  the  true 
value  thereof  —  from  the  surplus  revenue  derived  from  the  duties 
on  imports  and  the  tonnage  of  ships  or  vessels  to  December  31, 
1790.^  This  was  followed  by  acts  approved  May  8,  1792,  and 
March  3,  1795,  establishing  a  formal  sinking  fund.^ 

On  January  i,  1801,  the  debt  of  the  United  States  stood  at 
$80,038,050.^  Under  Jefferson's  administration,  with  Gallatin 
as  Secretary  of  the  Treasury,  the  policy  of  public  retrenchment 
with  a  view  to  the  reduction  of  the  debt  and  of  taxation  took  the 
field.  The  result  was  a  remarkable  reduction  of  debt  between  1801 
and  181 2.  The  net  reduction  was  $38,000,000,  but  the  real  amount 
paid  off  was  larger;  for  the  Louisiana  Purchase  was  responsible  for 
an  increase  of  $11,250,000  in  the  indebtedness.^ 

The  increase  in  the  public  debt  caused  by  the  War  of  181 2  was 
nearly  $88,000,000.''  A  committee  of  the  House  of  Representatives 
estimated  years  afterwards  that  during  this  war  the  actual  value 
in  specie  of  the  Treasury  receipts  for  over  $80,000,000  par  value 
of  loans  was  only  $34,000,000,  As  illustrating  the  credit  of  the 
United  States  at  this  time,  a  6%  loan  was  put  out  in  August, 
1813,  at  88|,  Afterwards  portions  of  a  6%  loan  were  sold  as  low 
as  65  measured  in  specie.^  In  January,  1816,  the  debt  stood  at 
$127,334,933.7 

After  1822,  owing  to  constant  surpluses  in  the  revenue,  the 
reduction  of  the  debt  was  rapid; ^  and  in  1836  the  United  States 
for  the  first  time  in  its  history  was  practically  out  of  debt.  There 
was  a  small  unpaid  balance,  —  $328,582.10,  as  estimated  Decem- 
ber 8,  1835,  —  which  remained  unpaid  solely  because  payment  had 
not  been  demanded.  Under  an  act  of  June  23,  1836,^  surplus  reve- 
nue to  the  amount  of  $28,101,644.91  was  distributed  to  the  several 
States.  10 

^  Tenth  Census,  vol.  vii,  p.  327. 

2  Acts  of  2d  Congress,  Session  i,  chap.  38,  i  Stat.  L.,  p.  281.-  Acts  of  3d  Congress, 
Session  2,  chap.  45,  i  Stat.  L.,  p.  433. 

^  Financial  Review  (1915),  p.  90.       *  Hirst,  p.  106;  and  Dewey,  pp.  119,  121,  124. 

6  Tenth  Census,  vol.  vii,  p.  352.  ^  Dewty,  p.  134. 

''  Financial  Review  (1915),  p.  90.  ^  Hirst,  pp.  109-10.  Dewey,  pp.  170-71. 

'  Acts  of  24th  Congress,  Session  i,  chap.  115,  5  Stat.  L.,  p.  52. 

"  Tenth  Census,  vol.  vii,  p.  361. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    45 

In  1837,  a  year  of  general  suspension  of  specie  payments  by  the 
banks,  Treasury  notes  were  issued  by  the  Government  on  a  large 
scale.  ^  There  was  a  considerable  deficit  —  amounting  in  Septem- 
ber, 1837,  to  about  $2,000,000,  Further  issues  of  notes  were  made 
from  1838  to  1843  inclusive,  and  longer  loans  were  made  in  1841 
and  1842.  These,  like  the  Treasury  notes,  were  put  out  to  take  care 
of  constantly  recurring  deficits  and  the  constantly  accumulating 
debt.2 

The  net  indebtedness  created  by  the  Mexican  War  (1846-48) 
was  $49,000,000.  All  the  loans,  bearing  6%  interest,  were  floated 
at  par  or  better.^  Among  these  was  a  loan  of  $16,000,000  issued 
under  an  act  approved  March  31,  1848,^  to  take  care  of  deficits 
occasioned  by  the  war.^ 

On  July  I,  185 1,  the  debt  stood  at  $68,304,796.  From  that  year 
it  was  reduced  untU  in  1857  the  net  debt  —  principal  of  the  debt 
less  cash  in  Treasury  —  was  only  $9,998,622.  The  panic  of  that 
year,  followed  by  the  failures  of  the  revenue  under  a  system  of  low 
tariffs,  caused  an  increase  in  the  debt  until  it  reached  $59,964,402 
on  July  I,  1860.^ 

The  Civil  War  bears  much  the  same  relation  to  American  debt 
history  as  do  the  Napoleonic  wars  to  British  debt  history.  This 
great  struggle  caused  an  enormous  increase  in  the  debt  of  the 
United  States;  but  owing  to  the  great  prosperity  which  followed 
the  war,  this  large  debt  was  reduced  until  it  ceased  to  become 
much  of  a  burden.  In  acts  approved  July  17  and  August  5,  1861,^ 
Congress  authorized  a  loan  of  not  over  $250,000,000  —  the  first 
important  loan  authorized  to  carry  on  the  Civil  War.  There  were 
issued  under  these  acts  $150,000,000  Treasury  notes  bearing  7.3% 
interest  and  $50,000,000  twenty-year  6%  bonds.^  On  December  30, 
1 86 1,  the  banks  suspended  specie  payment  and  were  followed  in 

'  There  had  been  considerable  issues  of  Treasury  notes  during  the  War  of  1812. 
(See  Dewey,  pp.  136-37.) 

2  Tenth  Census,  vol.  vii,  pp.  361-63.  In  1841,  the  Secretary  of  the  Treasury  in- 
formed Congress  that  during  the  previous  four  years,  the  expenditure  had  exceeded 
the  revenue  by  $31,310,014.   {Ibid.,  p.  362.) 

'  Dewey,  pp.  255-56.  *  Acts  of  30th  Congress,  Session  i,  9  Stat.  L.,  p.  217. 

'  Tenth  Census,  vol.  vn,  p.  367. 

'  Financial  Review  (1915),  p.  90;  and  Hirst,  p.  in. 

'  Acts  of  37th  Congress,  Session  i,  chaps.  5  and  46,  12  Stat.  L.,  pp.  259,  313. 

'  Tenth  Census,  vol.  vn,  pp.  375-84.  Dewey,  pp.  276-81,  306. 


4-6        AMERICAN  AND  FOREIGN  IN\^STMENT  BONDS 

this  by  the  Government.^  February  25,  1862,  there  was  passed 
the  famous  Act  ^  authorizing  among  other  things:  (i)  the  issue 
of  $150,000,000  legal- tender  United  States  notes;  (2)  the  issue  of 
$500,000,000  6%  bonds  payable  in  twenty  but  redeemable  after 
five  years  —  familiarly  known  as  the  "  five- twenties  " ;  and  (3)  the 
creation  of  a  sinking  fund.  Under  this  and  later  acts,  there  were 
issued  something  like  $450,000,000  of  legal-tender  notes  or  paper 
money.  There  were  also  issued  enormous  amounts  of  short-term 
Treasury  notes.  Long-  and  short-term  loans  followed  each  other  in 
rapid  succession  in  1863, 1864,  and  1865.  In  July  and  August,  1864, 
the  average  price  in  gold  of  the  paper  money  or  "greenbacks"  was 
thirty-nine  cents  on  the  dollar.  On  July  i,  1864,  the  premium  on 
gold  measured  in  paper  currency  reached  one  hundred  and  eighty- 
five  per  cent.  The  total  effect  of  paper  issues  in  increasing  the  cost 
of  the  war  has  been  estimated  at  between  $528,000,000  and  $600,- 
000,000.^  The  following  prices,^  during  the  Civil  War,  of  United 
States  6%  bonds  due  in  1881  may  be  of  interest:  — 


Low 


High 


1 86 1  (outbreak  of  war) 

1861 

1862 

1863 

1864 

1865 


84^  (AprU) 
83  (June) 
87 1  (January) 
91 1  (January) 
102  (July) 
103I  (March) 


94  (April) 

95  f  (October) 
1075  (June) 

1 1  of  (October) 
118  (April) 
ii2f  (January) 


The  debt  reached  its  maximum  on  August  31,  1865,  when  it 
amounted  to  $2,756,431,571.''  Of  the  gross  debt,  about  $1,1 10,000,- 
000  was  funded  debt,  about  $460,000,000  inconvertible  paper,  and 
about  $1,276,000,000  floating  debt.  The  cash  reserves  in  the  Treas- 
ury amounted  to  about  $88,000,000.^  The  annual  interest  charge 
on  the  debt  was  about  $151,000,000.'^ 

The  problems  which  faced  the  new  Secretary  of  the  Treasury 
after  the  war  were:  (i)  How  to  pay  off  or  fund  the  floating  debt, 
and  (2)  how  to  provide  a  permanent  scheme  of  debt  reduction. 

^  Dewey,  p.  281.     ^  Acts  of  37th  Congress,  Session  2,  chap,  s^,  12  Stat.  L.,  p.  345. 

3  Dewey,  pp.  284-97  a-nd  306.  *  Financial  Review  (1915),  p.  91. 

^  Ibid.,  p.  90. 

8  Bastabic  (1895),  p.  606.  See  also  Dewey,  pp.  316-17  and  i2>'2-3Z- 

'  Bastable  (1895),  p.  607. 


UNITED  STATES  AND  FOREIGN  GOVERNINIENT  BONDS    47 

Soon  after  the  dose  of  the  Civil  War,  the  revenues  began  to  show  a 
surplus  over  expenditures.  This  surplus  was  applied  from  time  to 
time  to  the  redemption  of  short-term  obligations.^  Such  portion  of 
these  obligations  as  could  not  be  redeemed  for  lack  of  funds  was 
converted  into  five-twenty  bonds  as  authorized  by  the  Acts  of 
March  3,  1865,^  and  April  12, 1866.^  In  a  little  over  twp  years,  the 
floating  debt  was  reduced  to  $408,000,000  and  the  inconvertible 
issues  reduced  by  over  $20,000,000,  while  new  funded  debt  to  the 
amount  of  $686,000,000  in  6%  bonds  had  been  issued.  These 
transactions  were  completed  by  May  i,  1869.^  The  Government 
then  began  using  the  surplus  revenues  in  the  purchase  of  its  un- 
matured bonds  at  the  market  price  in  currency.  It  paid,  in  terms 
of  gold,  $307,702,207.64  for  bonds  so  purchased.  The  average 
price  in  gold  was  $95.19.^  R.  Dudley  Baxter  has  estimated  the 
burden  of  the  American  national  debt  and  the  American  state 
debts  on  the  basis  of  annual  debt  charge  to  estimated  annual  in- 
come for  1868-70  at  2.7%.^ 

Under  Acts  of  July  14,  1870  ^  and  January  20,  1871,^  there  were 
authorized  to  be  sold,  at  not  less  than  par  in  coin,  $500,000,000 
5%  ten-year  bonds,  $300,000,000  4!%  fifteen-year  bonds,  and 
$1,000,000,000  4%  thirty-year  bonds,  the  proceeds  to  be  applied 
to  the  redemption  of  the  war  debt.  The  refunding  operations  under 
these  acts  began  in  1871  and  continued  until  the  summer  of  1879. 
A  total  of  $1,395,345,950  bonds  were  refunded  under  these  acts; 
and  the  annual  saving  in  interest  to  the  Government  was  $19,900,- 
846.50,  On  January  i,  1879,  specie  pa>Tnents  were  resumed.  As 
the  remaining  Civil  War  debt  matured,  it  was  either  continued  at 
a  lower  rate  of  interest  or  redeemed  in  gold.  The  continued  bonds 
also  were  redeemed  from  time  to  time  as  the  surplus  revenues  per- 
mitted until  no  bonds  remained  outstanding  except  those  author- 
ized  by  the  refunding  acts.    These  last-mentioned  bonds  from 

*  U.S.  Treasury  Department,  Circular  52  (Washington,  1913),  p.  8. 
2  Acts  of  38th  Congress,  Session  2,  chap.  77,  13  Stat.  L.,  p.  468. 

^  Acts  of  39th  Congress,  Session  i,  chap.  39,  14  Stat.  L.,  p.  31. 

*  U.S.  Treasury  Department,  Circular  52  (Washington,  1913),  p.  8;  and  Bastable 
(1895),  pp.  606-07. 

^  U.S.  Treasury  Department,  Circular  52  (Washington,  1913),  p.  8. 
^  Baxter,  National  Debts  (1871),  p.  92. 

^  Acts  of  41st  Congress,  Session  2,  chap.  256,  16  Stat.  L.,  p.  272. 
8  Acts  of  41st  Congress,  Session  3,  chap.  23,  16  Stat.  L.,  p.  399. 


48        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

time  to  time  were  purchased  with  surplus  revenues  or  redeemed 
as  they  became  redeemable.  The  last  of  them  —  the  residue  of  the 
4%  bonds  of  1907  —  were  called  for  redemption  April  2,  1907,  and 
ceased  to  bear  interest  July  2  of  that  year.^  The  redemption  of  the 
American  Civil  War  debt  has  been  regarded  by  experts  as  little 
short  of  astounding.  It  makes  the  reduction  of  the  British  debt  in 
the  hundred  years  after  the  Napoleonic  wars  seem  relatively  in- 
significant. The  methods  by  which  the  United  States  reduced  its 
debt  have  been  criticized;^  but  the  result  everywhere  has  been 
admired.  The  United  States  paid  off  its  Civil  War  debt  in  the 
wholesale,  wasteful,  unscientific,  but  effective  American  way. 
The  following  figures  give  an  idea  of  the  extent  and  rapidity  of 
the  reduction  of  the  debt :  — 

NET   DEBTS 

July  I,  1865 $2,674,815,856 

July  I,  1875 2,090,041,170 

July  I,  1885 1,375,352,443 

July  I,  1893  838,969,476 

We  have  closed  the  statement  with  1893  because  in  the  following 
year  new  borrowings  began. 

The  protective  tariff,  whether  wise  or  unwise  from  any  other 
point  of  view,  undoubtedly  was  one  of  the  chief  factors  which  made 
possible  the  large  reduction  in  the  Civil  War  debt.  The  Wilson 
Tariff  Act  of  1894,  on  the  other  hand,  combined  with  the  effects  of 
the  panic  of  1893  and  the  financial  heresies  which  followed,  led  to 
a  considerable  enlargement  of  the  United  States  debt.  Between 
1894  and  1896,  $262,315,400  of  bonds  were  issued  either  to  main- 
tain the  gold  reserve  of  the  Treasury  or  to  redeem  obligations  of  the 
United  States.^  On  July  i,  1896,  the  net  debt  stood  at  $955,297,- 
254.  The  war  with  Spain  in  1898  brought  the  debt  on  July  i,  1899, 
to  a  net  figure  of  $1,155,320,235.  From  this  date,  there  was  a  more 
or  less  steady  reduction  until  1908,  when  the  debt  stood  at  $938,- 
132,409.^  Since  then  there  has  been  a  moderate  increase  in  the  debt 

1  U.S.  Treasury  Department,  Circular  52  (Washington,  1913),  pp.  9-11. 

2  Baxter  (1871),  p.  31,  and  Hirst  (pp.  122-23).      ^  Financial  Review  (1915),  p.  90. 
*  U.S.  Treasury  Department,  Circular  52  (Washington,  1913),  pp.  11-12.    See  also 

Dewey,  pp.  449-55- 

6  Financial  Review  (1915),  p.  9°-  Dewey,  pp.  465-68. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    49 

through  the  issue  of  bonds  for  the  construction  of  the  Panama 
Canal  ^  and  for  the  postal  savings  banks.  As  illustrating  the  high 
point  which  United  States  credit  has  reached,  the  Government  was 
able  in  1900  to  issue  2%  bonds  at  not  less  than  par  to  refund  issues 
bearing  higher  rates  of  interest.^  These  bonds  were,  to  be  sure, 
particularly  attractive  as  a  basis  for  national  bank-note  circulation. 
Their  issue,  however,  together  with  the  prices  of  all  United  States 
bonds  for  the  past  ten  or  a  dozen  years,  showed  the  credit  of  the 
United  States  to  be  as  high  as,  if  not  higher  than,  that  of  any  other 
nation  in  the  world. 

Russia,  like  Austria,  has  been  a  country  of  paper  money  and  of 
more  or  less  continual  deficits.  Paper  money  was  issued  as  early 
as  the  reign  of  Catherine  II,  under  a  manifesto  dated 
December  29,  1768.  At  the  death  of  the  Empress, 
there  had  been  issued  assignats  for  $124,749,686.  These  became 
largely  depreciated  as  compared  with  coin.^  Mulhall  gives  the 
total  debt  of  Russia  in  1799  as  about  $225,600,000.^  There  were 
further  issues  of  paper  money  during  the  wars  with  Napoleon  and 
with  Turkey.  In  18 10,  the  amount  of  the  debt  outstanding  was 
estimated  at  $456,295,206.  The  Czar  Alexander  I  declared  the 
whole  property  of  the  State  to  be  security  for  it.  Three  years  of 
war  —  1812-15  —  required  $253,058,000  above  the  ordinary  ex- 
penditures. In  181 5,  the  assignats  were  exchangeable  for  silver 
rubles  on  the  basis  of  418  to  100.  After  the  Napoleonic  wars,  the 
amount  of  the  state  debt  acknowledged  was  not  much  above 
$98,850,781,  but  the  paper  money  in  circulation  amounted  to 
something  like  $661,114,025.^ 

Loans  payable  in  paper  —  6%  at  83^  —  were  contracted  at 
home  in  1817 ;  in  1818,  paper  loans  abroad  were  contracted  with  6% 
interest  at  85;  in  1820,  there  was  a  silver  loan  abroad  with  5%  in- 
terest at  72.  For  $31,632,250  of  loans,  the  Government  actually 
received  only  $22,933,381.  Later  further  loans  were  contracted  at 
77to77|.  In  1823,  the  assignats  or  paper  money  in  circulation 
amounted  to  $471,320,525.^  In  1839,  an  attempt  was  made  to 
restore  the  silver  standard,  and  the  exchange  of  the  silver  ruble  for 

'  U.S.  Treasury  Department,  Circular  52  (Washington,  1913),  pp.  16-17. 

*  See  Dewey,  p.  471.  *  Tenth  Census,  vol.  vii,  p.  272. 

*  Mulhall  (1899),  P-  266.  6  Tenth  Census,  vol.  vn,  p.  272.         «  Ibid. 


50        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

assignats  was  fixed  at  350.^  Mulhall  gives  the  total  Russian  debt 
in  1840  as  about  $720,000,000.^  In  1843,  the  former  bank  assignats 
were  withdrawn  entirely  from  circulation  by  the  creation  of  impe- 
rial bills  of  credit,  which,  with  the  forced  exchange,  were  to  circulate 
equally  with  the  silver  ruble.  There  came  into  existence  $131,160,- 
205  of  such  bills,  with  which  the  461,496,035  assignats  which  were 
still  current  in  1843  had  been  redeemed.  In  this  way  was  carried 
through  the  compromise  of  the  debt.^ 

The  whole  of  the  state  property  was  to  form  security  for  the 
newly  created  imperial  credit  notes,  and  was  to  form  sufficient 
capital  for  redemption.  This  state  property  was  estimated  at 
$3,063,903,399,  but  the  redemption  fund  was  not  sufficient. 
Meanwhile  the  deficits  in  the  state  finances  continued.  In  1849, 
the  paper  money  was  reduced  to  $237,505,474.  During  the  Cri- 
mean War,  the  issue  of  paper  money  increased  greatly.  In  1855, 
there  were  issued  temporary  bills  of  credit  for  "all  the  extraordi- 
nary expenses  of  the  War" !  The  Treasury  did  not  wish  to  increase 
taxes.  The  export  of  gold  was  forbidden,  and  the  mass  of  paper 
money  issued  was  to  be  called  in  within  three  years  after  the  resto- 
ration of  peace.  As  a  matter  of  fact,  however,  the  amount  was  not 
diminished  until  long  after  this.^  Dudley  Baxter  estimated  the 
Russian  debt  in  1858,  two  years  after  the  Crimean  War,  at  about 
$1,152,000,000.^ 

In  1862,  there  was  put  out  a  silver  loan  to  furnish  means  of  re- 
storing a  metal  standard.  The  paper  money  was  to  be  exchanged 
from  May  i,  1862,  with  a  loss  of  io§%;  afterward  it  was  to  be 
exchanged  at  a  higher  rate  so  that  it  should  be  at  par  by  January 
I,  1864.  A  beginning  was  made,  but  the  means  available  proved 
insufficient.  By  a  decree  of  November  19,  1863,  payment  of  the 
paper  money  again  was  deferred.  The  forced  rate  of  exchange 
returned  and  with  it  the  variation  of  the  standards.  The  Russian 
state  debt  for  many  years  increased  in  a  most  serious  manner. 
Deficits  were  becoming  a  permanent  evil.^  Mulhall  gives  the  total 
Russian  debt  in  1875  as  about  $1,776,000,000  and  in  1889  as  about 
$3,628,800,000.  He  gives  the  origin  of  the  debt  existing  at  this 
time  as  follows :  ^  — 

1  Tenth  Census,  vol.  vii,  p.  272.  ^  Mulhall  (1899),  p.  266. 

3  Tenth  Census,  vol.  vii,  p.  272.         *  Ibid.,  pp.  272-73.        ^  Baxter  (1871),  p.  68. 

6  Tenth  Census,  vol.  vii,  p.  273.  '  Mulhall  (1899),  p.  267. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    5 1 

Redemption  of  the  serfs  (1858-63) $408,000,000 

Railways  and  telegraphs 816,000,000 

Crimean  War 681,600,000 

Turkish  War 638,400,000 

Sundries 1,084,800,000 

Total $3,628,800,000 

The  Russo-Japanese  War  (1904-05)  was  responsible  for  a  con- 
siderable increase  in  the  Russian  debt.  This  debt  has  been  huge 
for  many  years;  but  the  population  and  the  resources  of  Russia 
have  also  been  huge  —  although  the  latter  still  are  largely  unde- 
veloped. Baxter  estimated  the  burden  of  the  Russian  debt,  includ- 
ing railway  guarantees,  for  1868-70,  on  the  basis  of  debt  charge 
to  estimated  national  income,  as  2.5%.^  Our  figure  for  1912,  with- 
out deducting  debt  incurred  for  railways,  is  2.77%.  So  far  as  the 
writer  knows,  Russia  never  has  failed  to  fulfill  her  obligations  to 
foreign  creditors.^  As  illustrating  the  fluctuations  in  Russian  credit 
for  the  past  forty  years,  Russian  4%  railroad  bonds  (Nicolai) 
sold  in  1877  —  at  the  outbreak  of  the  Turko-Russian  War  —  on 
about  a  6.49%  income  basis;  in  1891,  they  had  recovered  to  about 
a  4.06%  basis;  and  in  1896,  4%  railroad  bonds  sold  to  yield  only 
about  3.76%.  In  1907,  after  Russia's  defeat  by  Japan,  Russian 
4%  rentes  sold  to  yield  about  5.89%. 

The  Italian  Republics,  as  we  mentioned  in  our  introduction, 
very  early  inaugurated  the  system  of  funded  debts.  Early  in  the 
nineteenth  century,  the  Kingdom  of  Naples  was  a  large 
borrower  in  proportion  to  her  means  and  developed  ^  ^ 
a  debt  of  about  $120,000,000.  The  Kingdom  of  Sardinia  before  its 
era  of  annexation  was  very  economical,  and  in  1847  had  a  debt  of 
only  about  $24,000,000.  The  troubles  of  1848  and  the  wars  with 
Austria  and  Russia  increased  the  debt  by  1858  to  about  $192,000,- 
000.  On  the  constitution  of  the  Kingdom  of  Italy  in  1861,  the  con- 
solidated Italian  debt,^  including  more  than  $120,000,000  for  that 
of  Naples,  amounted,  according  to  Baxter,  to  about  $403,200,000,^ 

1  Baxter  (1871),  p.  92.  2  Tenth  Census,  vol.  vii,  p.  273. 

*  A  decree  of  July,  1861,  for  altering  all  former  bonds  into  new  5%  bonds  for  the 
purpose  of  the  unification  of  the  state  debts  affected  the  creditors  of  the  former  states 
in  very  vmequal  degrees,  though  generally  very  seriously.  The  market  price  of  the 
older  bonds  varied  greatly,  but  all  were  higher  than  the  exchange  for  the  new  paper. 
{Tenth  Census,  vol.  vn,  p.  274.) 

*  Baxter  (1871),  p.  58. 


52        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

and  according  to  Professor  Levi,  to  about  $432,000,000.^  Thus 
Italy  entered  the  family  of  nations  burdened  with  a  heavy  debt 
in  proportion  to  her  resources,  which  at  that  time  were  compara- 
tively undeveloped.^ 

From  1861  the  debt  increased  rapidly.  Mulhall^  gives  the  total 
debt  in  1870  as  $1,598,400,000;  in  1880,  as  $1,886,400,000;  and  in 
1890,  as  about  $2,208,000,000.  A  considerable  part  of  this  increase 
was  caused  by  continual  deficits.^  Mulhall  gives  the  debt^  about 
1890  as  made  up  as  follows:  — 

Railways,  about $384,000,000 

War  and  military  expenditure 1,296,000,000 

Sundries 528,000,000 

Total $2,208,000,000 

The  participation  of  Italy  in  the  Triple  AUiance  and  the  ambi- 
tious colonial  schemes  under  Crispi  were  responsible  for  a  large 
part  of  the  increase  in  the  ItaUan  debt  and  for  the  decline  in  her 
credit  which  at  one  time  was  so  marked.  In  1873,  Italian  5% 
rentes  sold  to  yield  an  income  of  about  7.80%,  and  in  1894,  sold  on 
about  a  6.05%  basis.  Later,  with  the  abandonment  of  her  ambi- 
tious schemes  of  expansion,  Italian  credit  recovered.  In  July,  1906, 
there  took  place  a  successful  conversion  of  the  5%  gross  (4%  net) 
and  the  4%  net  rentes  into  3!%  stock,  to  be  reduced  after  five 
years  to  3^%.  The  amount  converted  was  about  $1,555,283,486, 
and  the  saving  in  interest  was  about  $3,840,000  per  annum  for  the 
first  five  years  and  about  double  that  afterwards.^  In  January, 
1913,  Italian  3^%  rentes  sold  to  yield  only  about  3.65%.  The  na- 
tional debt  of  Italy  ever  since  the  foundation  of  the  modern  king- 
dom has  been  a  heavy  burden  on  the  population  and  resources  of 
the  country.  Deficits  have  been  frequent  and  the  burden  of  taxa- 
tion very  great.  ^  The  interest  on  the  debt  has  absorbed  a  large  part 
of  the  government  expenditure.  Yet  Italians  have  repurchased  a 
large  part  of  their  national  debt  formerly  held  in  other  countries. 

At  the  death  of  Frederick  the  Great  in  1786,  Prussia  not  only  had 

^  Levi,  Journal  of  the  Royal  Statistical  Society  (1862),  vol.  xxv,  p.  327. 

2  Ibid.  3  Mulhall  (1899),  p.  268.  *  Baxter  (1871),  p.  58. 

6  Mulhall  (1899),  p.  268. 

'  Encyclopwdia  Britannica  (nth  cd.,  191 1),  vol.  xv,  p.  23. 

^  Bastable  (1895),  p.  603. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    53 

no  national  debt,  but  had  about  $52,500,000  in  the  government 
vaults  at  Berlin,  which  money  afterwards  was  used  in 
the  wars  against  Napoleon  I.^  In  1800,  the  capital  of  ^ 

the  debt,  according  to  Baxter,  was  only  about  $25,200,000.  By 
1820,  however,  on  account  of  the  Napoleonic  wars,  it  had  risen  to 
about  $148,800,000.  This  debt  weighed  heavily  upon  a  nation  of 
10,000,000  to  11,000,000  people  ruined  by  invasions  and  warfare. 
Yet  in  1842,  nearly  $48,000,000  had  been  paid  off,  and  the  debt 
was  reduced  to  about  $100,800,000.^  This  was  done  through  the 
sale  of  public  property  and  through  taxation.  In  1848,  the  interest 
charge  was  only  about  $3,120,000.^ 

After  the  Revolutions  of  1848,  a  series  of  deficits  took  place 
which  increased  the  debt  rapidly.  Between  1850  and  1864  a  num- 
ber of  loans  were  contracted  for  military  preparations  and  for  the 
construction  of  great  lines  of  railway.  These  loans  brought  the 
debt  in  1866  to  about  $201,600,000.  The  war  with  Austria  brought 
the  debt  in  1870  to  about  $272,160,000,  to  which  should  be  added 
the  debts  of  the  States  annexed  in  1866,  amounting  to  about 
$46,560,000  —  making  a  total  debt  for  Prussia  and  annexed  States 
in  1870  of  about  $318,720,000.^  The  total  debt  of  the  German 
Empire  and  States  in  1870  has  been  given  by  Baxter  as  follows:  — 

Prussia  and  annexed  States $318,720,000 

Remaining  North  German  States 137,760,000 

South  German  States 236,160,000 

German  Confederate  loans  of  1867  and  July  and  Decem- 
ber, 1870 127,680,000 

Total   capital   debt,   German  Empire  and   States, 

1870,  about  $820,320,000 

Of  this  total  capital,  about  $327,912,000  represented  expendi- 
tures for  railways  and  public  works,  so  that  the  unremunerative 
debt  was  only  about  $492,408,000.  The  total  interest  of  the  debt 
in  1870  was  about  $35,232,000.  To  take  care  of  this  charge,  the 
German  States  had  the  net  receipts  of  their  railways  and  the  pro- 
duce of  the  public  mines  and  iron  works,  which  in  Prussia,  Saxony, 
and  other  States  balanced  the  interest  of  the  debts.^  The  accom- 

^  Tenth  Census,  vol.  vn,  p.  277.  ^  Baxter  (1871),  p.  38. 

5  Bastable  (1895),  p.  604.  *  Baxter  (1871),  pp.  38-39. 

^  Ibid.,  pp.  39-40. 


54        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

panying  table  ^  shows  the  debts  of  Prussia  and  of  the  principal 
German  States  combined,  including  Prussia,  for  1881,  1891,  1901, 
1908,  and  1912. 


DEBTS  OF  THIRTEEN  GERMAN  STATES 


1881 

i8gi 

IQOI 

jpoS 

1912 

$463,740,000 
760,864,000 

$1,376,824,000 
791,780,000 

$1,538,072,000 
981,324,000 

$1,879,268,000 
1,236,168,000 

$2,225,214,264 
1,471,428,046 

Twelve  other  states 

Total 

$1,224,604,000 

$2,168,604,000 

$2,539,596,000 

$3,115,436,000 

$3,696,642,310 

$1.00  =  50  pence  English 
I  mark  =  ii.S  pence  English 

Owing  to  the  fact  that  such  a  large  proportion  of  the  debts  of  the 
German  States  is  for  productive  purposes,  these  debts  have  been  a 
very  slight,  if  any,  burden  on  the  States.  We  have  called  attention 
to  this  fact  in  estimating  the  burden  of  debt  earlier  in  this  chapter. 
Baxter  has  estimated  percentage  of  debt  charge  to  national  income 
for  Prussia  and  the  German  States,  1815-20,  at  1.3%;  for  Prussia 
and  Germany,  1837-43,  at  .6%.^  If  we  deduct  from  the  debts  of 
the  German  States  the  value  of  the  railways,  the  burden  of  the 
debt  in  191 2  will  prove  very  slight. 

The  imperial  debt,  however,  is  much  more  a  dead-weight  debt. 
It  has  been  created  largely  for  military  purposes.  In  1881,  the  debt 
of  the  Empire  was  only  about  $63,200,800;  in  1891,  it  had  risen  to 
about  $311,000,800;  and  in  1908,  to  about  $1,003,826,000.  Between 
1 88 1  and  1908,  the  imperial  debt  has  been  multiplied  more  than 
fifteen  times.  ^  The  expedition  to  China,  the  wars  in  Southwest 
Africa,  and  the  construction  of  the  Kaiser-Wilhelm  (Kiel)  Canal 
were  responsible  for  an  increase  of  about  $195,408,000  in  the 
imperial  debt.^  By  far  the  largest  single  item  added  to  the  debt  on 
behalf  of  all  the  States  of  the  Empire  is  that  for  the  imperial  army 
and  the  next  largest  item  for  the  imperial  navy.^  In  addition  to  the 
funded  debt  of  the  Empire,  there  is  a  considerable  floating  debt 
consisting  of  long-term  and  short-term  Treasury  issues.  The  first 

1  Hirst,  p.  67,  and  Statistisches  Jahrbuch  (Berlin,  1913),  p.  346. 

2  Baxter  (1871),  pp.  89-91. 

»  Hirst,  p.  56.  «  Ibid.,  p.  57.  »  /j^j.^  p.  ^g. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    55 

class  increased  greatly  between  1898  and  1908.^  The  debt  charge^ 
of  the  German  imperial  debt  was  estimated  by  Baxter  for  1868-70 
at  about  1%  of  national  income.  Our  figure  for  the  Empire  in  1912 
is  .55%,  and  for  the  Empire  and  States  combined,  2.13%, 

It  can  be  seen  that  the  debt  burden  of  the  German  States  and 
of  the  German  Empire  throughout  their  history  has  been  compara- 
tively slight.^  The  record  of  good  faith  and  of  debt  payment  also 
has  been  in  both  cases  excellent.  The  great  European  war  will  put 
the  German  people,  however,  to  a  test  of  a  severity  never  before 
experienced  or  even  probably  clearly  conceived.  The  credit  of 
Prussia  and  of  the  German  Empire  during  recent  years  has  corre- 
sponded very  closely.^  It  reached  its  highest  point  since  1873  in 
April,  1903,  when  Prussian  3^%  consols  sold  to  yield  a  net  income 
of  about  3.48%. 

The  Japanese  debt,  like  that  of  the  German  Empire,  is  a  matter 
of  comparatively  recent  history.  When  the  fiefs  were  surrendered 
to  the  sovereign  at  the  beginning  of  the  Meiji  Era 
(1867),  it  was  decided  to  provide  for  the  feudal  nobles 
and  the  Samurai  by  the  payment  of  lump  sums  in  commutation  or 
by  giving  to  them  public  bonds.  On  this  account  there  were  issued 
$93,835,000  of  bonds.  This  was  the  foundation  of  the  Japanese 
national  debt.  It  represented  the  bulk  of  the  State's  liabilities  dur- 
ing the  first  twenty-five  years  of  the  Meiji  period.  There  were 
issued  also  $10,535,000  bonds  in  part  payment  for  the  debts  of  the 
fiefs.  The  Satsuma  Revolt  in  1877  was  responsible  for  a  loan  of 
$7,350,000.  Other  loans  were  raised  as  follows:  For  public  works, 
$16,170,000;  $6,370,000  for  naval  construction,  and  $7,105,000  in 
connection  with  fiat  currency  —  making  a  total  of  $149,450,000. 
This  represented  the  whole  national  debt  of  Japan  for  the  first 
twenty-eight  years  of  her  new  era  under  imperial  administra- 
tion, ^ 

The  war  with  China  (1894-95)  caused  a  large  increase  in  the 
Japanese  debt.  The  direct  expenditures  on  account  of  the  war  were 

^  Hirst,  p.  63. 

^  Baxter  takes  the  debt  charge  exclusive  of  sinking  fund  and  surpluses  applicable 
to  a  reduction  of  the  debt.   (1871),  p.  44. 

'  Imperial  taxation  per  head,  however,  almost  quadrupled  in  the  thirty-sk  years 
between  1872  and  1908,  having  risen  from  about  $1.42  to  about  $5.19.  (Hirst,  p.  52.) 

*  Hirst,  p.  69.  5  Encyclopadia  Britannica  (nth  ed.,  1911),  vol.  xv,  p.  218. 


56        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

about  $98,000,000,  of  which  about  $66,150,000  were  added  to  the 
national  debt.  Following  the  war  there  was  begun  a  large  pro- 
gramme of  armaments  and  public  works.  The  expenditures  for 
the  unproductive  purposes,  including  coast  fortifications,  dock- 
yards, and  similar  works,  came  to  $153,860,000.  The  total  for 
productive  expenditures  —  $93,100,000  —  was  made  up  partly 
as  follows:  For  railways,  telegraphs,  and  telephones,  $58,800,000; 
$9,800,000  for  riparian  improvements;  and  $9,800,000  in  aid  of 
industrial  and  agricultural  banks  and  similar  enterprises.  The 
whole  programme,  which,  with  trifling  exceptions,  was  to  be  in 
operation  by  1905,  involved  an  outlay  of  $246,960,000.  Of  this  the 
Chinese  indemnity,  the  surplus  of  the  annual  revenue,  and  other 
assets  furnished  about  $147,000,000.  It  was  the  intention  to  raise 
the  remaining  $99,960,000  through  domestic  loans.  It  was  found 
impossible  to  obtain  the  money  necessary  at  home  without  paying 
an  excessive  rate  of  interest.  In  1899,  a  loan  of  about  $48,000,000 
at  4%  was  obtained  in  London.  These  bonds  were  sold  at  90.  In 
1902,  all  Japanese  domestic  loans  were  on  a  uniform  basis.  They 
carried  5%  interest,  ran  for  five  years  without  redemption,  and 
were  then  to  be  redeemed  within  fifty  years  at  the  latest.  The 
redemption  was  to  be  by  purchasing  the  stock  in  the  open  market 
or  by  drawing  lots.  It  was  expected  that  the  national  debt  would 
reach  its  maximum  —  $281,750,000  —  in  1903.^ 

The  war  with  Russia,  however,  upset  these  calculations.  Peace 
came  in  the  autumn  of  1905.  Japan  had  been  obliged  to  borrow 
$198,450,000  at  home  and  $516,460,000  abroad.  In  1908,  the  total 
debt  amounted  to  $1,115,240,000.  Of  this,  $543,900,000  was 
domestic  debt  and  $571,340,000  represented  foreign  borrowings. 
The  debt  had  grown  from  $274,890,000  in  1904  to  $1,115,240,000 
in  1908,  or  from  $5.54  per  head  in  1904  to  $21.46  per  head  in  1908. 
The  debt  carried  interest  of  from  4%  to  5%.^  Soon  after  the  war 
with  Russia,  seventeen  private  railways  were  nationalized  at  a 
cost  of  $245,000,000.  This  brought  the  state  debt  to  $1 ,360,240,000 
in  all.  In  1908,  a  scheme  was  adopted  for  appropriating  at  least 
$24,500,000  annually  for  the  purpose  of  redeeming  the  debt.^  Ow- 
ing to  the  undeveloped  character  of  her  resources  and  to  the  more 

1  EncyclopcEdia  Britannica  (nth  ed.,  1911),  vol.  xv,  pp.  218-19. 
*  Ibid.  p.  219.  ^  Ibid. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    57 

or  less  confused  condition  of  her  finances,  the  debt  incurred  during 
the  war  with  Russia  has  been  a  very  heavy  burden  upon  Japan. 
With  her  expansion  in  Korea  and  China,  however,  provided  she 
keeps  out  of  further  wars  for  some  time,  Japan  probably  will  be 
able  to  take  care  of  this  debt  without  serious  trouble.  The  present 
great  war,  in  which  Japan  has  been  a  participant,  has  added  only 
moderately  to  her  financial  burdens. 

We  have  dealt  at  greater  or  less  length  with  the  debt  histories  of 
the  nations  which  to-day  are  considered  the  great  Powers.  We 
have  traced  also  in  a  general  way  the  origin  and  devel-    ^ 

.  .  Summary  of 

opment  of  national  debts  in  Europe  and  Amenca.  national 
We  have  referred  also  to  the  epidemic  of  borrowing 
which  broke  out  in  the  second  half  of  the  nineteenth  century  and 
which  did  not  subside  until  all  the  South  European  states,  such  as 
Spain,  Portugal,  and  Italy,  and  the  Spanish  and  Portuguese  states 
of  South  America,  had  entered  the  money  market.  Some  nations 
borrowed  for  war,  others  for  railways  —  but  all  borrowed.  Be- 
tween 1848  and  1873,  the  debts  of  the  defaulting  states  of  Spain 
and  her  colonies  tripled.  They  probably  stopped  even  at  this  figure 
only  from  the  impossibihty  of  further  borrowing.^  In  discussing 
this  situation  in  1874,  Dudley  Baxter  divided  the  nations  of  the 
world  in  debt  matters  into  the  following  four  classes: 

(i)  Economical  states,  whose  debts  grow  less  in  proportion  to 
their  resources. 

(2)  Vigorous  borrowing  states,  that  borrow  freely  but  not  beyond 
their  resources. 

(3)  Over-borrowing  and  declining  states,  whose  debts  are  heavy 
and  continually  increase  more  rapidly  than  their  resources. 

(4)  Defaulting  or  insolvent  states. 

In  the  first  class  —  that  is,  the  economical  states  —  Baxter  at 
that  time  placed  the  United  Kingdom,  Denmark,  Holland,  Bel- 
gium, the  German  States,  the  British  Colonies  and  Sweden  ;2  in 
the  class  of  defaulting  or  insolvent  states  he  listed  Spain,  Greece, 
Ecuador,  Mexico,  Venezuela,  San  Domingo,  and  Honduras.  Bax- 
ter spoke  of  zones  of  credit  around  the  center  of  good  credit, 

^  Journal  of  the  Royal  Statistical  Society  (1874),  vol.  xxxvii,  p.  8. 
*  He  does  not  include  the  United  States,  which  was  then  struggling  to  pay  off  its 
great  Civil  War  debt. 


58        MIERICAN  AND  FOREIGN  INVESTMENT  BONDS 

London.  He  referred  to  the  countries  of  low  interest  as  being  all  in 
the  North  and  all  Teutonic,  such  as  England,  Denmark,  Holland, 
Germany,  and  Sweden.^  These  observations  have  an  interesting 
bearing  to-day. 

Principal  loans  ^hc  accompanying  table  (page  59)  shows  the  amount 
in  default,  of  loans  of  independent  governments  listed  by  the 

1877-I914,  as  .         r      1         /-^  •  r  • 

listed  by  the  Council  of  the  Corporation  of  Foreign  Bondholders  as 
o{°p^rdgn°"  being  in  default  as  to  principal  at  various  periods 
Bondiioiders       ^gtween  1877  and  1912. 

The  figures  for  191 2  show  only  Guatemala  and  Honduras  in 
default  as  to  the  principal  of  their  loans.  Since  191 2,  however, 
Mexico  again  has  joined  the  list  of  defaulting  states  with  an  ap- 
proximate amount  of  principal  in  default  of  $170,531,102.^ 

Perhaps,  as  bearing  on  credit,  more  important  even  than  the 
record  of  good  faith  is  what  may  be  called  the  general  standing  of 
General  ^  nation  in  the  civilized  world.    This  factor,  indeed, 

standing  of  a       morc  than  any  other,  may  be  said  to  determine  na- 

nation  the  ,  •'  .       •'      . 

most  important  tioual  Credit  at  any  given  time.  How  do  the  great 
nations  of  the  world  stand  to-day?  What  are  the 
forms  of  their  governments,  the  nature  of  their  institutions,  the 
character  of  their  people,  and  their  military  and  economic  posi- 
tions? Are  they  developing  or  are  they  declining,  or,  as  we  some- 
times say,  are  they  "coming"  or  "going"? 

We  have  indicated  earUer  in  this  chapter  the  nature  of  the  insti- 
tutions of  the  United  States.  Its  government,  of  course,  is  that  of  a 
Forms  of  federal  repubhc  of  independent  or  balanced  powers, 

IndTnsTitu-  legislative,  executive,  and  judicial.  In  the  early  days 
*^  eat  ° owSs  —  ^^  ^^^  Republic,  public  opinion  was  formed  largely 
United  States  through  the  exchange  of  views  among  a  few  leading 
men.  Actually  the  government  was  aristocratic  rather  than  dem- 
ocratic. After  the  people  of  the  Eastern  States  crossed  the  Alle- 
gheny Mountains,  however,  and  settled  the  West,  actual  democ- 
racy under  the  conditions  of  frontier  life  developed  rapidly.  From 
the  time  of  Andrew  Jackson  until  the  present,  popular  government 
or  government  controlled  by  the  will  of  the  great  mass  of  the  people 

^  Journal  of  the  Royal  Statistical  Society  (March,  1874),  vol.  xxxvn,  pp.  2-13. 
2  Council  of  the  Corporation  of  Foreign  Bondholders,  Forty-First  Annual  General 
Report,  p.  369. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    £9 


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6o        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

has  grown  steadily.^  To-day  public  opinion,  instead  of  being 
formed  from  the  top  downwards,  is  formed  through  newspapers 
and  otherwise  from  the  bottom  upward  to  the  highest  officials  of 
the  Government.  This,  in  our  opinion,  is  a  great  factor  in  national 
safety  and  in  national  credit.  It  means  that  back  of  any  important 
move  on  the  part  of  the  American  Government  is  the  opinion  of  a 
majority,  if  not  practically  all,  of  the  American  people. 

Much  the  same  situation  prevails  in  England  —  though  the 
actual  form  of  the  Government  is  that  of  a  constitutional  monarchy 
with  a  ministry  responsible  to  the  House  of  Commons. 
The  Reform  Bill  of  1832  represented  the  spread  of  the 
democratic  idea  in  England.  The  Government  of  England  before 
that  time  had  been  a  Government  largely  of  country  squires.  With 
the  growth  of  manufacturing  and  of  the  cities  and  with  the  repeal 
of  the  Corn  Laws,  there  developed  a  democracy  based  on  indus- 
triahsm.  Great  impetus  has  been  given  to  the  democratic  move- 
ment in  England  during  the  past  ten  years. 

The  Government  in  France  is  a  curious  compromise  between  the 
English  and  the  American  systems.  The  French  Government  of 
to-day  is  more  or  less  of  a  makeshift.  It  grew  out  of 
the  critical  necessities  of  the  French  people  after  their 
defeat  by  Prussia  in  187 1.  Its  efficiency  remains  to  be  proved. 
The  paternal  nature  of  the  Government,  the  centrahzation  of 
power,  and  the  system  of  administrative  courts,  by  which  the  acts 
of  the  Government  are  dealt  with  under  a  different  system  of  law 
from  that  of  the  acts  of  individuals  —  all  are  unfamiliar  to  the 
Anglo-Saxon  mind.  In  the  Chamber  of  Deputies  there  exist  a  large 
number  of  groups  of  various  shades  of  opinion  instead  of  the  two 
parties  with  which  Englishmen  and  Americans  are  familiar.  Presi- 
dent Lowell  makes  the  point  that  since  the  Third  RepubHc  there 
have  been  frequent  changes  in  ministries,  but  no  real  changes  in  the 
party  in  control  of  the  Government.^  Incoherent  as  the  French 
government  sometimes  seems,  it  has  this  one  great  underlying 
virtue :  it  derives  its  authority  from  the  people. 

The  Government  of  Italy  is  that  of  a  constitutional  monarchy 

*  See  E.  L.  Godkin,  Unforeseen  Tendencies  of  Democracy  (Boston  and  New  York, 
1898),  pp.  1-47  and  183-225. 

2  A.  Lawrence  Lowell,  The  Governments  of  France,  Italy,  and  Germany  (Cambridge, 
1914),  p.  114. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    6 1 

with  a  parliamentary  system.  The  ministers  are  responsible  to  the 
popular  House.  Owing  to  the  system  of  groups,  however,  rather 
than  parties,  —  which  we  have  spoken  of  in  connec- 
tion with  France,  —  the  parHamentary  system  in 
Italy  does  not  work  with  anything  like  the  smoothness  and  preci- 
sion that  it  does  in  England.  The  power  of  the  King  sometimes  is 
considerable.^ 

The  Government  of  Germany,  unlike  that  of  the  others  so  far 
mentioned,  instead  of  being  democratic  in  its  general  character,  is 
aristocratic  and  autocratic.    There  is,  of  course,  a 

1       -r-.    •   1  11  1  •        Germany 

popular  house,  the  Reichstag,  but  the  real  power  m 
the  government  of  the  Empire  and  in  practically  all  matters  of 
common  interest  of  the  various  German  States  is  exercised  by  the 
Bundesrath  or  Federal  Council  —  "that  extraordinary  mixture  of 
legislative  chamber,  executive  council,  court  of  appeal,  and  perma- 
nent assembly  of  diplomats."  ^  The  Bundesrath  is  composed  of  dele- 
gates appointed  by  the  princes  of  the  States  and  the  senates  of  the 
Free  Cities.^  Owing  to  the  position  of  Prussia  in  the  Bundesrath 
and  in  the  Empire,  the  German  Emperor  as  Ejng  of  Prussia  is  in  a 
position  to  control  pretty  largely  the  affairs  of  the  Empire.  There 
is  lacking  any  effective  method  of  bringing  to  bear  the  force  of  pub- 
lic opinion  in  matters  of  government.  In  Germany  as  in  France, 
moreover,  there  exists  an  extreme  centralization  and  paternalism. 
This  is  carried  sometimes  to  the  smallest  matters  in  the  daily  lives 
of  the  people.^  Suppression  of  newspapers  and  of  pubHc  meetings 
for  expressing  sentiments  contrary  to  the  opinions  of  those  high  in 
authority  has  been  common.^  Price  Collier  has  referred  to  the 
conditions  in  Germany  as  "  the  governing  of  the  people  by  suppres- 
sion and  strangulation."  ®  All  this  has  been  done  in  the  name  of 
efficiency.  There  is,  in  a  broad  way,  an  ominous  similarity  between 
the  relation  of  the  German  people  to  their  Government  at  present 
and  that  of  the  French  people  to  their  Government  before  the 
French  Revolution.^    The  German  people  have  a  splendid  record 

^  Lowell,  pp.  125-27.  2  ii,i4^^  p,  iQi,  3  jjji^^ 

*  Price  Collier,  Germany  and  the  Germans  (New  York,  19 14),  p.  399. 

^  Ibid.,  pp.  163-65.  8  Jiid^^  p.  4g8. 

^  For  the  alternative  of  revolution  under  an  extreme  development  of  the  protective 
system,  see  Buckle's  remarks  on  Spain,  History  of  Civilization  (New  York,  1861),  vol. 
n,  pp.  123-24. 


62        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

for  the  payment  of  their  debts;  but  what  will  be  their  attitude  if 
they  find  themselves  saddled  with  a  debt  of  unprecedented  and 
almost  unimagined  size,  incurred  for  a  purpose  which  has  proved 
fruitless  of  results,  disastrous  to  their  economic  and  financial  condi- 
tion, and  unfortunate  in  its  effect  on  the  relations  of  the  German 
people  with  the  people  of  other  nations? 

The  Government  of  Austria-Hungary  is  that  of  a  constitutional 
Empire  composed  of  two  autonomous  kingdoms  —  Austria  and 
Austria-  Hungary.  Each  retains  a  large  measure  of  indepen- 

Hungary  dencc.    The  personal  power  of  the  present  Emperor, 

Francis  Joseph  I,  has  been  great.  The  bond  between  Austria  and 
Hungary,  however,  with  their  many  divergent  and  sometimes  an- 
tagonistic races,  is  at  best  a  weak  one.  If  the  present  war  should 
have  an  unfortunate  outcome  for  Austria-Hungary,  it  would  leave 
that  country  with  its  large  debts  in  a  situation  which  would  offer 
very  little  inducement  to  make  new  loans  and  perhaps  even  make 
doubtful  the  collection  of  a  large  part  of  her  present  obligations. 
The  very  existence  of  Austria-Hungary  as  one,  or  even  as  two 
nations,  is  at  present  an  enigma.^ 

The  Government  of  Russia  still  is  almost  entirely  autocratic  — 
though  the  machinery  has  been  furnished  for  a  later 
development  of  something  like  popular  government. 
The  rulers  of  Russia  have  shown  a  disposition  to  make  concessions, 
even  though  small  ones,  to  the  people.  It  is  doubtful  whether  the 
Russian  people  at  present  are  fitted  for  a  greater  degree  of  self- 
government  than  they  now  possess,  though  there  are  signs  of  dis- 
quiet and  discontent  with  present  conditions.  Many  agrarian  and 
economic  problems  remain  to  be  worked  out,  and  the  great  natural 
resources  of  Russia  remain  to  be  developed.  Progress  toward  popu- 
lar government  in  Russia  will  be  either  through  concessions  granted 
by  the  Czars  and  the  governing  class  or  by  revolution.  There  is 
nothing  at  the  moment,  as  far  as  the  relations  of  the  people  to  their 
Government  go,  which  would  lead  one  to  fear  for  the  payment  of 
their  national  debt. 

The  Government  of  the  only  other  country  under  special  con- 
sideration —  that  of  Japan  —  is  a  constitutional  monarchy  with  a 

^  For  the  system  of  government  in  Austria-Hungary,  see  Encyclopedia  Britannica 
(nth  ed.,  1911),  vol.  Ill,  p.  2. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    63 

large  amount  of  power  in  times  of  crisis  or  of  great  importance 
in  the  hands  of  a  small  group  of  men  known  as  the  Elder  States- 
men.   The  Ministers  of  State  or  the  Cabinet  are  ap- 
pointed by  the  Emperor  and  are  responsible  to  him 
alone.  ^  There  is  a  diet  of  two  houses.  The  Government  seems  to 
work  reasonably  well. 

The  character  of  the  population  has  an  important  bearing  on 
credit.  The  population  of  the  United  States  is,  on  the  whole,  better 
than  that  of  any  other  great  civilized  nation.  It  has  character  of 
vigor  and  abiUty,  resourcefulness,  knowledge,  and  the  population 
general  individual  efficiency  of  a  high  order.  During  the  past  one 
hundred  years  the  population  of  Great  Britain  has  been  much  the 
same.  The  English-speaking  race  as  a  whole  has  been  during  that 
time  the  most  remarkable  of  all  the  races  of  the  world.  The  popu- 
lation of  France  and  Germany  is  highly  intelligent  and  efficient. 
That  of  Russia,  while  vigorous  and  patient,  is  lacking  in  resource- 
fulness and  adaptability.  It  is  what  may  be  called  relatively  unde- 
veloped. It  was  not  until  1863  that  serfdom  was  completely 
abolished.^  The  population  of  Austria-Hungary  is  the  least  homo- 
geneous of  all  the  nations  under  consideration.  Germans,  Magyars, 
Serbs,  Czechs,  Poles,  and  Croats  Hve  under  one  scepter  in  a  condi- 
tion sometimes  bordering  on  anarchy.  The  people  of  Japan  are 
notably  homogeneous  and  have  shown  a  remarkable  adaptabihty 
to  modern  ideas  and  methods.  In  the  matter  of  education  or  liter- 
acy, Germany,  the  United  States,  and  Great  Britain  make  the  best 
showing,  and  Russia,  Hungary,  Italy,  and  Japan  ^  the  poorest.'* 
Illiteracy  or  ignorance  is  a  bad  companion  for  financial  responsibil- 
ity, though  the  two  sometimes  are  found  together.  The  character 
of  the  population  of  many  Central  and  South  American  countries 
probably  is  the  main  reason  not  only  for  the  instability  of  their 
governments,  but  for  their  relatively  low  credit. 

*  Encyclopedia  Britannica  (nth  ed.,  1911),  vol.  xv,  p.  203. 

*  Ploetz,  p.  500. 

'  Elementary  education  in  Japan  is  now,  however,  compulsory.  {Statesman's  Year- 
Book  [1915],  p.  1091.) 

*  Mulhall  (1899),  p.  231.  Webb  (1911),  p.  219.  Statesman's  Year-Book  (1915), 
passim.  In  some  parts  of  Russia,  illiteracy  is  over  50%;  in  Hungary  it  is  between  40% 
and  45%;  and  in  Italy  between  about  33%  and  about  49%  as  against  7.7%  in  1910  for 
the  United  States.   {Statesman's  Year-Book  (1915),  pp.  434,  700,  1060  and  1281.) 


64        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Another  important  factor  in  credit  is  the  military  standing  of  a 
nation.  History  has  shown  that  no  nation  that  is  not  in  a  condition 
Military  of  actual  or  potential  military  efficiency  long  con- 

position  tinues  to  have  good  credit.   A  striking  illustration  is 

that  of  China  with  its  immense  population  and  wealth  and  its  rec- 
ord of  good  faith.  The  inability  or  unwilHngness  of  China  to  defend 
itself  has  kept  its  credit  at  a  relatively  low  point.  Germany,  France, 
Russia,  Austria-Hungary,  Italy,  and  the  Balkan  countries  all  have 
adopted  the  poUcy  of  universal  liability  to  miHtary  service.^  The 
United  States  and  Great  Britain  have  followed  the  policy  of  main- 
taining small  standing  armies  and  depending  on  volunteers  in  time 
of  war.  If  all  countries  adopt  the  plan  of  universal  miUtary  service, 
it  will  lose  its  value  for  any  one  country;  if  all  finally  renounce  it, 
all  countries  will  be  equal  in  this  respect  and  will  have  the  advan- 
tage of  being  able  to  use  their  resources  for  productive  purposes.  At 
the  same  time,  abiUty  and  willingness  to  fight  when  necessary  are 
absolutely  essential  under  any  conditions  known  to  human  history 
for  the  continuance  of  successful  national  existence.  Without  the 
abihty  to  defend  its  territory,  population,  and  resources,  a  nation 
has  the  least  secure  of  all  foundations  for  national  credit.  In  this 
respect  the  United  States,  with  its  enormous  resources,  its  at- 
tempted maintenance  of  the  Monroe  Doctrine,  and  its  participa- 
tion in  the  affairs  of  the  Old  World,  is  in  a  weak  position  at  the 
moment.^  At  the  same  time  it  is  only  fair  to  say  that  the  United 
States,  no  less  than  the  other  great  nations  of  the  world,  —  Great 
Britain,  France,  Germany,  Italy,  Austria-Hungary,  Russia,  and 
Japan,  —  may  be  called  actually  or  potentially  a  first-class  military 
nation. 

Another  important  consideration  in  determining  national  credit 
is  the  economic  situation.  This  may  be  said  to  embrace  the  position 
General  ^^  ^  country  in  regard  to  farming  and  to  its  food  sup- 

economic  plies,  its  position  as  to  manufacturing  and  its  position 

position  .  1  1     r  •  n-M 

as  to  mternal  and  foreign  commerce.  Ihat  country 
which  comes  the  nearest  to  economic  self-sufficiency  is  in  the  safest 
position  and  has,  other  things  being  equal,  the  best  basis  for  good 

^  Statist  (London),  vol.  Lxxxi,  p.  350. 

'^  Steps  are  being  taken  to  remedy  this  condition.  (See  Commercial  and  Financial 
Chronicle,  vol.  loi,  p.  337.) 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    65 

credit.  Of  the  nations  under  discussion,  probably  the  United 
States  and  Russia  come  the  nearest  to  complete  economic  self- 
sufficiency.  In  this  respect,  however,  the  position  of  the  United 
States  is  immeasurably  better  than  that  of  Russia.  The  United 
States  produces  within  its  own  continental  borders  almost  every- 
thing it  needs,  not  only  in  the  way  of  food  supplies,  but  in  raw 
materials  for  its  enormous  and  constantly  increasing  industries. 
Great  Britain  is  in  the  weakest  position  in  this  respect.  She  is 
obhged  to  import  from  three  quarters  to  four  fifths  of  her  food  and 
a  large  part  of  her  raw  materials.^  France,  owing  to  its  system  of 
intensive  farming,  usually  imports  only  a  moderate  amount  of  food. 
Germany,  Austria-Hungary,  Italy,  and  Japan  all  have  a  consider- 
able degree  of  economic  self-sufficiency.  The  great  manufacturing, 
foreign  commerce,  shipping,  and  banking  of  Great  Britain,  pro- 
tected by  her  navy,  in  her  case  have  removed  farming  as  a  factor  of 
any  significance.  On  account  of  being,  however,  absolutely  de- 
pendent on  her  navy  even  for  her  food  supplies.  Great  Britain  is  in 
a  more  precarious  position  than  some  of  the  other  countries  under 
consideration.  Throughout  the  nineteenth  century  and  the  open- 
ing years  of  the  twentieth,  there  has  been  a  constantly  increasing 
development  of  the  great  nations  of  the  world  in  manufacturing  or 
industry  at  the  expense  of  farming.  Great  Britain,  France,  and 
Germany  particularly  have  developed  their  manufactures  and  in- 
creased their  foreign  trade  with  the  other  nations  of  the  world. 
They  have  purchased  food  or  raw  materials  from  the  younger  and 
less  developed  countries,  such  as  the  United  States,^  Russia,  and 
Argentina,  and  have  sold  them  their  finished  products,  such  as 
cotton  and  woolen  goods,  iron  and  steel  manufactures,  and  many 
other  articles  required.  They  have  also  loaned  largely  of  their  ac- 
cumulated capital  to  the  countries  which  were  in  a  position  to  fur- 
nish them  with  food  or  raw  materials.  The  extraordinary  develop- 
ment of  the  United  States  during  the  past  fifty  years  has  been 
possible  largely  through  obtaining  capital  from  Europe  —  espe- 
cially England.  Russia  has  been  financed  for  many  years  largely 
by  France.^ 

^  See  the  Statist,  vol.  Lxxxi,  p.  533. 

^  Of  recent  years  the  United  States,  while  still  an  enormous  producer  of  food  and 
raw  materials,  is  coming  to  be  more  and  more  a  manufacturing  or  industrial  nation. 
^  For  an  interesting  discussion  of  this  subject,  see  Sir  George  Paish  in  the  Statist, 

vol.  LXXXI,  p.  463. 


66        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

The  trade  or  commerce  of  a  nation  shows  in  a  broad  way  its 
economic  position.  The  domestic  trade  of  the  United  States  is 
Trade  many   times  greater   than  its   foreign   trade.    The 

position  Bureau  of  Statistics,  Department  of  Commerce,  has 

estimated  our  domestic  commerce  in  191 1  at  $33,000,000,000,  or 
nearly  ten  times  our  foreign  trade  for  the  same  year.  The  same 
authority  has  estimated  our  domestic  commerce  in  19 14  at  $40,- 
000,000,000  ^  made  up  as  follows :  — 

Manufactures $24,000,000,000 

Agricultural  products 10,000,000,000 

Mineral  products 2,500,000,000 

Fisheries 500,000,000 

Value  added  to  all  this  by 

transportation 1,000,000,000 

Imports 2,000,000,000 

$40,000,000,000 

This  huge  total  largely  has  made  possible  annual  savings  esti- 
mated at  $6,720,000,000  a  year. 2  It  shows  on  how  broad  and  firm 
a  basis  the  credit  of  the  United  States  rests.  In  a  broad  way,  the 
trade  position  of  a  nation  is  not  merely  the  domestic  or  the  foreign 
commerce  in  merchandise,  or  both  together,  but  rather  the  position 
as  debtor  or  creditor  in  toto.  In  other  words,  we  must  examine  the 
position  of  a  nation  not  only  as  to  its  domestic  commerce  and  its 
merchandise  imports  and  exports,  but  also  as  to  whether  it  is  a 
debtor  or  creditor  in  the  matter  of  interest  on  securities,  whether  it 
receives  a  large  portion  of  the  freight  charges  in  international  trade, 
whether  it  receives  an  excess  of  banking  or  other  commissions,  and 
other  similar  considerations. 

We  give  below  table  showing  merchandise  imports  and  exports, 
excess  of  either,  and  total  foreign  trade  of  the  principal  commercial 
Foreign  nations  of  the  world  for  the  year  ending  December  3 1 , 

commerce  i  g  1 2 .  We  take  this  year  in  order  to  show  fairly  normal 

conditions  and  in  order  to  correlate  the  figures  with  our  figures  of 
estimated  resources  and  debt. 

^  This  compares  with  only  $7,000,000,000  as  the  internal  commerce  of  the  United 
States  in  1870.  (From  address  of  O.  P.  Austin,  chief  of  the  former  Bureau  of  Statistics, 
Department  of  Commerce,  enclosed  with  letter  from  Department,  May  20,  1915.) 

2  Statist,  vol.  Lxxxi,  p.  608. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS     (ij 


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68        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

On  a  merchandise  basis,  of  recent  years  at  any  rate,  the  United 
States  and  Russia  are  the  only  great  nations  that  have  shown  a 
normal  excess  of  exports  over  imports.  In  other  words,  not  only 
Great  Britain,  France,  and  Germany,  but  also  Austria-Hungary, 
Italy,  and  Japan  have  shown  of  recent  years  an  excess  of  imports 
over  exports.^ 

On  the  other  hand,  the  United  States  and  Russia  have  been 
heavy  annual  debtors  in  the  matter  of  interest  on  securities, 
Invisible  whereas  Great  Britain,  France,  Holland,  and  probably 

trade  balance  Germany  havc  been  creditors  in  this  respect.  The 
United  States  has  been  a  heavy  debtor  also  in  the  matters  of 
freights,  commissions,  money  sent  abroad  by  immigrants,  and 
taken  abroad  by  travelers  —  in  fact,  in  almost  every  item  which 
enters  into  what  is  called  the  ''invisible  trade  balance."  Great 
Britain,  on  the  other  hand,  has  been  a  creditor  in  all  or  almost  all 
these  respects.  She  has  had  a  surplus  fund  invested  in  securities  all 
over  the  world.  She  has  done  a  very  large  percentage  of  the  carry- 
ing trade  of  the  world  and  a  very  large  proportion  of  its  banking 
business.^  In  other  words,  while  the  merchandise  foreign  trade  of 
the  United  States  has  appeared  to  show  her  the  largest  creditor  and 
that  of  Great  Britain  has  appeared  to  show  her  the  largest  debtor, 
the  factors  in  the  invisible  trade  balance  have  resulted  in  a  situation 
actually  very  different.  Great  Britain  and  the  United  States  offer 
the  two  most  striking  examples  of  the  interplay  of  foreign  com- 
merce and  the  invisible  items  of  the  trade  balance.  Sir  George 
Paish  has  estimated  Great  Britain's  capital  investments  in  foreign 
and  colonial  countries  as  about  $15,000,000,000.^  He  has  estimated 
more  recently  that  Great  Britain  receives  from  colonial  and  foreign 
nations  a  total  income  of  about  $1 ,680,000,000  a  year.  On  the  basis 
of  a  difference  between  merchandise  imports  and  exports  of,  say, 

1  Statistical  Abstract  for  Foreign  Countries  (London,  1914),  pp.  99-111. 

2  Until  recently  practically  every  transaction  in  American  foreign  exchange 
amounting  to  $100,000  or  over  has  gone,  the  writer  has  been  told,  through  London. 

^  He  gives  (reduced  from  pounds  sterling  at  the  rate  of  $4.80  to  the  pound) :  — 

Total  investments  in  Colonies,  India,  and  foreign  countries $15,320,812,800 

Investments  in  British  Colonies  and  India $7,459,929,600 

Investments  in  foreign  countries 7,860,883,200 

Capital  investments  exceeding  £50,000,000  ($240,000,000) :  — 

In  the  United  States $3,302,774,400 

In  Argentine 1,295,078,400 

In  Brazil 453,312,000 

In  Mexico 419,203,200 

In  Japan 257,784.000 

{Journal  oj  the  Royal  Statistical  Society,  January,  191 1,  p.  186.) 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS     69 

$625,000,000,  Great  Britain  is  able  to  purchase  something  like 
$1,000,000,000  a  year  of  securities  from  abroad.^  The  amount  of 
European  capital  invested  in  what  may  be  called  permanent  securi- 
ties in  the  United  States  before  the  war  has  been  estimated  by  the 
National  City  Bank  of  New  York  —  taking  into  consideration  the 
figures  of  Sir  George  Paish  in  1910,  the  recent  figures  of  Mr.  L.  F. 
Loree  for  railroads,  and  the  recent  figures  of  the  New  York  Clearing- 
House  for  industrials  —  at  between  $5,000,000,000  and  $6,500,- 
000,000.^  The  net  payments  by  the  United  States  to  other  coun- 
tries of  items  entering  into  the  invisible  trade  balance  have  been 
somewhat  as  follows:  — 

Net  interest  on  foreign  capital $250,000,000 

Net  balance  of  expenditure  of  American 

citizens  in  other  lands '. 170,000,000 

Net  remittances  of  foreign-bom  citizens 

to  friends  in  Europe  and  elsewhere  .  .  .  150,000,000 
Net  sum  paid  to  other  countries  for  ocean 

freights 25,000,000 

Total  of  items  owed  on  the  invisible 

trade  balance $595,000,000  ^ 

This  accounts  in  a  general  way  for  the  normal  excess  of  merchan- 
dise exports  over  imports  shown  by  the  United  States.  All  foreign 
trade  must  be  settled  finally  with  merchandise,  services,  or  gold.  At 
any  given  time,  however,  the  import  or  export  of  capital  to  be  set- 

^  Statist  (London),  vol.  Lxxxi,  pp.  393-94. 

^  Letter  of  National  City  Bank,  dated  July  3, 1915.  —  See  also  Economist  (London), 
July  17,  1915  (vol.  lxxxi),  p.  84.  The  amount  of  American  securities  held  abroad 
necessarily  is  a  matter  of  opinion. 

*  Trade  Balance  of  the  United  States  (1910),  p.  191.  Figures  of  Dr.  E.  E.  Pratt,  chief 
of  the  Bureau  of  Foreign  and  Domestic  Commerce,  as  given  in  an  address  at  the  an- 
nual meeting  of  the  California  Bankers'  Association,  San  Francisco,  May  27,  1915, 
gave  the  total  estimated  debt  of  the  United  States  to  Europe  as  $7,000,000,000  owing 
principally  to  the  following  countries :  — 

England $4,000,000,000 

France i  ,000,000,000 

Germany 1,250,000.000 

Holland 650,000,000 

Dr.  Pratt  estimated:  — 

Net  interest  on  securities $300,000,000 

Tourist  expenditures 250,000.000 

Remittances  to  friends 150,000,000 

Freights 50,000,000 

Total $750,000,000 

For  the  fiscal  year  ending  June  30,  19 14,  Dr.  Pratt  estimated  that  we  had  to  make 
payments  to  Europe  amounting  to  $55,000,000  more  than  the  total  amount  of  mer- 
chandise exported. 


70        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

tied  with  securities  may  play  a  large  part.  The  great  lending  coun- 
tries have  been  Great  Britain,  France,  Holland,  Germany,  Belgium, 
and  Switzerland.  Of  these  countries  Great  Britain  has  been  by  far 
the  most  important  lender,  with,  as  stated  above,  foreign  invest- 
ments in  the  neighborhood  of  $15,000,000,000.  Germany  and 
France  come  next  with  investments  of,  say,  about  $8,000,000,000 
each.^  The  investments  of  Holland,  Belgium,  and  Switzerland  are 
of  much  smaller  amount,  but  are  nevertheless  considerable.  The 
merchandise  imports  of  all  these  five  countries  largely  exceed  their 
exports  in  consequence  of  receipt  of  interest  and  of  tourist  expendi- 
tures. In  the  case  of  Great  Britain,  excess  is  paid  for  further  by  the 
earnings  of  British  ships,  the  tonnage  of  which  forms  such  a  large 
part  of  the  world's  international  shipping  facilities.^  A  large  excess 
of  merchandise  imports  over  exports  usually  indicates  that  a  coun- 
try is  in  a  position  to  receive  a  large  amount  of  interest  on  capital 
invested  in  other  countries;  a  large  excess  of  exports  over  imports 
usually  indicates  that  a  country  is  forced  to  pay  heavy  sums  in 
interest  and  dividends  on  its  securities  owned  abroad.  Sometimes 
an  excess  of  merchandise  imports  over  exports  means  the  import  of 
capital  in  the  form  of  merchandise  to  be  paid  for  with  securities. 
The  amount  of  American  securities  held  abroad  has  been  consider- 
ably reduced  since  the  opening  of  the  great  war,  though  probably 
not  to  the  extent  that  many  accounts  would  lead  one  to  believe.^ 

^  These  facts  should  be  borne  in  mind  in  estimating  the  ability  of  these  nations  to 
pay  for  the  costliest  war  in  history. 

2  Trade  Balance  of  the  United  States  (1910),  pp.  169-70. 

3  A  letter  received  from  the  National  City  Bank  of  New  York,  July  3,  1915,  esti- 
mates the  amount  of  American  securities  repurchased  from  abroad  since  the  beginning 
of  the  war  at  between  $300,000,000  and  $500,000,000.  There  has  also  been  puixhased 
in  this  country  a  considerable  amount  of  foreign  goverimient  securities. 

We  give  below  a  hst  of  loans  to  foreign  nations  raised  in  the  United  States  from  the 
begiiming  of  the  war  up  to  October  23,  1915:  — 

Russian  Government  acceptances $25,000,000 

French  Government  one-year  notes 10,000,000 

French  one-year  5  %  loan 50,000,000 

Dominion  of  Canada  s  %  one-  and  two-year  notes 40,000,000 

Canadian  Provincial  and  municipal  loans 85,500,000 

German  nine-months  5%  notes 10,000,000 

Swedish  Government  two-year  notes 5,000,000 

Argentine  National  one-three-year  loan 15,000,000 

Argentine  five-year  6%  bonds 25,000,000 

Norway  short-term  loan 3,000,000 

Bolivian  loan i  ,000,000 

Republic  of  Panama  thirty-year  5  per  cents 3,000.000 

Swiss  Government  one-five-year  notes 15,000,000 

Anglo-French  five-year  5  %  loan 500,000,000 

Italian  one-year  6%  notes 25,000,000 

Total $812,500,000 

(Stalist  [London],  vol.  lxxxv,  pp.  65  and  180.) 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS     7 1 

The  United  States  also  has  purchased  considerable  amounts  of 
foreign  securities. 

All  these  matters  have  an  important  bearing  on  the  economic 
and  financial  status  of  a  nation  and  therefore  on  its  credit.   The 
present  war  may  change  appreciably  the  relative  rank   „      . 
of  the  great  nations  of  the  world.    We  will  sketch  the  leading 
briefly  their  situation  as  it  appears  to-day. 

The  United  States,  in  the  size  and  character  of  its  territory  and 
population,  in  the  stabiHty  of  its  government,  and  in  its  general 
political,  commercial,  and  financial  strength,  holds 
to-day  an  almost  unique  position.  It  has  the  almost  the  United 
unparalleled  advantage  of  having  been  settled  by  a 
vigorous  and  intelligent  population,  possessed  of  all  the  knowledge 
of  Europe  at  tlie  time  of  settlement  and  then  placed  in  possession 
of  a  vast  territory  with  resources  practically  untouched.  The  devel- 
opment of  these  resources  by  such  a  population  has  brought  the 
United  States  to  its  present  commanding  position.  The  opening  of 
the  Panama  Canal,  the  new  banking  system,  improved  relations 
with  South  America,  and  the  great  war  have  given  the  United 
States  an  opportunity  that  comes  to  few  nations  at  any  time.  Un- 
less the  unforeseen  happens,  it  is  even  more  favorable  than  the 
situation  of  Great  Britain  after  the  Napoleonic  wars;  for  the  United 
States  has  one  great  advantage  which  was  conspicuously  absent  in 
the  case  of  Great  Britain  at  that  time  —  an  exceedingly  small 
national  debt.  The  United  States,  moreover,  not  only  is  now  ex- 
porting an  excess  of  merchandise  of  something  Hke  $1,000,000,000 
a  year  (June  30, 191 5),  —  which  on  such  a  scale  as  this  is  a  tempo- 
rary state  of  affairs,  —  but  is  in  a  position  to  increase  greatly  its 
permanent  or  normal  foreign  trade.  This  is  often  the  forerunner  of 
a  commanding  financial  position.^  The  weak  point  in  the  economic 
situation  of  the  United  States  is  the  lack  of  an  adequate  merchant 
marine.  This  should  be  remedied.  With  her  enormous  farming  and 
manufacturing  interests,  —  greater  than  those  of  any  other  coun- 
try, —  the  United  States  is  in  a  fair  way  to  become  the  leading 
commercial  and  financial  nation  of  the  world.  From  almost  any 
angle  that  one  looks  at  it,  this  country  is  entitled  to  credit  as  high 
as  that  of  any  nation  in  the  world. 

^  See  George  J.  Goschen,  The  Theory  of  the  Foreign  Exchanges  (London,  1896), 
PP-  32-35- 


72        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

During  the  past  one  hundred  years,  Great  Britain  has  been  con- 
sidered, on  the  whole,  the  leading  civilized  nation  in  the  world. 

„  .  .        After  the  Seven  Years'  War  in  Europe  and  the  French- 
Great  Bntam  .  .       _     ,      -  , 

and-Indian  War  in  America,  England  became  pre- 
dominant in  the  New  World.  By  the  final  defeat  of  Napoleon,  she 
established  herself  as  the  first  nation  in  Europe.  In  a  broad  way 
this  is  the  reason  why  British  consols  have  sold  for  most  of  this 
period  higher  than  the  bonds  of  any  other  Government.  As  indi- 
cated earlier,  however,  the  economic  and  political  position  of  Great 
Britain  to-day  is  by  no  means  secure.  On  account  of  being  abso- 
lutely dependent  on  her  navy  for  the  maintenance  of  her  great 
position  in  the  world,  Great  Britain  is  in  a  precarious  and  at  times 
dangerous  position.  A  serious  impairment  of  her  naval  power 
might  lead  to  the  breaking-up  of  the  British  Empire  as  at  present 
composed.  The  English-speaking,  self-governing  dominions,  such 
as  Canada,  Australia,  and  South  Africa,  probably  would  grow  in 
power  and  might  remain  strongly  attached  by  ties  of  affection  to 
the  mother  country ;  but  the  center  of  gravity  of  the  Empire  would 
be  shifted. 

France  in  the  early  part  of  the  eighteenth  century  was  the  first 
nation  in  Europe.  In  population,  wealth,  power,  and  prestige  she 
clearly  led  all  other  nations.  The  long  revolutionary 
wars  of  France,  however,  and  her  final  defeat  by  the 
Allies  left  her  greatly  weakened.  She  never  again  recovered  her 
leading  position;  but  in  the  thirty  or  forty  years  preceding  the  war 
of  1870  she  showed  a  notable  expansion  in  industry  and  wealth. 
With  the  halting  of  her  own  development  after  the  war  with  Prus- 
sia, France  became  one  of  the  principal  lending  nations  of  Europe. 
The  French  people  have  been  exceedingly  saving,  and  have  not 
only  made  possible  the  wide  distribution  of  French  rentes  in 
France,  but  the  lending  of  large  sums  to  Russia  and  other  foreign 
countries.  Since  1870,  France  has  succeeded  in  building  up  a  very 
respectable  Colonial  empire. 

Germany  has  shown  an  extraordinary  growth  in  population  and 

wealth  during  the  past  forty  years.  She  has  not  only  made  herself 

the  strongest  single  military  power  in  Europe,  but  has 

developed  her  industries  and  her  foreign  trade  to  a 

point  which  threatened  the  supremacy  of  England.   This  extraor- 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS     73 

dinary  development  made  necessary  also  efforts  toward  outside 
expansion.  The  pressure  of  population  in  Germany  probably  has 
been  greater  than  anywhere  else,  except  possibly  in  Japan. ^  Ger- 
many's burdens  for  military  preparation  have  been  great.  Her 
colossal  policies  of  expansion  by  force  —  sometimes  described  as 
Pan-Germanism  ^  —  have  placed  her  in  a  precarious  position. 
During  the  present  war,  she  has  not  only  increased  enormously  the 
burden  of  her  debts,  but  has  alienated  to  a  large  extent  the  friend- 
ship of  the  rest  of  the  world.  This  cannot  but  react  unfavorably 
on  her  credit. 

Italy  and  Austria-Hungary  are  relatively  poor  countries  with 
heavy  burdens  of  taxation  and  heavy  debts.  The  financial  condi- 
tion of  each  at  many  times  has  been  precarious.^  Italy,  Austria- 
Italy  is  making  strenuous  efforts  to  extend  her  bound-  Ru"s!a?nd 
aries  at  the  expense  of  Austria  —  particularly  in  what  J^p^° 
are  called  "the  unredeemed  provinces,"  which  include  Trent  and  a 
portion  of  the  eastern  shores  of  the  Adriatic.  Russia  is  a  country 
continental  in  area  with  by  far  the  largest  population  of  all  the 
great  powers.  The  resources  of  the  country,  however,  are  largely 
undeveloped,  the  railways  are  comparatively  few,  and  the  general 
economic  and  financial  condition  leaves  great  room  for  improve- 
ment. Her  army  has  been  to  her  a  considerable  burden.^  Owing  to 
her  great  resources,  even  though  they  are  now  undeveloped, 
Russia  probably  will  be  able  to  take  care  of  her  debts.  Japan  is  a 
country  in  which  the  best  part  of  the  population  devotes  itself  to 
mihtary  pursuits.  Business  is  regarded  as  a  means  to  an  end  and 
business  men  as  inferior  to  the  military  class.  Japan  has  a  large 
population  for  the  size  of  its  territory  and  the  scantiness  of  its 
resources.  Unless  it  can  find  and  develop  in  Korea,  and  perhaps  in 
China,  a  wealth  that  will  enable  it  to  become  a  rich  and  powerful 
industrial  nation,  "it  cannot  hope  to  satisfy  its  national  ambitions 
to  say  nothing  of  its  European  creditors."  ^ 

1  Statistical  Abstract  for  Foreign  Countries  (London,  1914),  pp.  8-11. 

2  According  to  Professor  Usher,  the  German  dream  of  to-day  has  been  the  estab- 
lishment of  an  empire  comprising  Germany,  Holland,  Belgiimi,  Denmark,  Switzer- 
land, Italy,  Austria-Hungary,  the  Balkans,  Turkey,  and  Asia  Minor  —  a  new  world 
state  bounded  by  the  North  Sea,  the  Baltic,  the  Persian  Gulf,  and  the  Mediterranean. 
{American  Review  of  Reviews,  November,  1914,  p.  616.) 

^  Economist  (London),  vol.  lxxex,  p.  874,  and  vol.  Lxxx,  p.  56.  Statist  (London), 
vol.  Lxxxi,  pp.  158-59,  349-50,  and  552. 

*  Statist  (London),  vol.  lxxxi,  p.  530.      ^  Economist  (London),  vol.  lxxx,  p.  671. 


74        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

We  have  discussed  in  a  general  way  the  credit  of  the  leading  civ- 
ilized nations  of  the  world.  We  have  gone  into  the  leading  factors 
Prices  of  making  up  their  credit  under  what  may  be  called 

foVs^ancfor  normal  conditions.  Before  discussing  the  bearing  of 
French  rentes  ^]^g  present  great  war  on  national  credit,  we  wish  to 
give  an  idea  of  the  course  of  prices  of  some  of  the  leading  govern- 
ment bonds  for  a  series  of  years.  Since  the  close  of  the  eighteenth 
century,  the  credit  of  Great  Britain  has  been  most  of  the  time 
higher  than  that  of  any  other  nation.  France  for  most  of  the  time 
has  held  second  position  —  though  at  times  French  credit  has  been 
strained  severely.  The  accompanying  table  (on  page  75)  shows 
the  highest  and  lowest  prices  by  ten-year  periods  for  a  long  series  of 
years  of  British  consols  and  French  rentes. 

An  examination  of  these  prices  makes  one  feel  that  government 
bonds  should  be  thought  of  more  as  one  thinks  of  stocks  —  that  is, 
as  being  liable  to  great  fluctuations.  In  fact,  the  common  European 
name  for  government  securities  is  stocks.  We  should  think  of  these 
securities,  especially  as  there  is  no  legal  means  of  enforcing  pay- 
ment, as  fluctuating  with  the  position  and  prosperity  of  the  nation 
almost  as  much  as  does  the  common  stock  of  a  railroad  or  an  indus- 
trial concern.  This  may  seem  an  extreme  statement;  but  the  record 
of  national  good  faith  and  the  fluctuation  in  the  prices  of  govern- 
ment securities  make  it  entirely  reasonable. 

Still  more  will  this  appear  when  we  extend  our  investigations  to 
the  prices  of  government  bonds  other  than  English  and  French. 
Prices  of  The  accompanying  table  (on  page  77)  shows  the  high- 

irnment^bonds,  ^st  and  lowcst  priccs  ou  an  income  basis  for  ten-year 
1873-1912  periods,  mostly  since  1873,  of  United  States  bonds, 

British  consols,  French  rentes,  Prussian  consols,  Italian,  Austrian, 
Russian,  and  Japanese  bonds. 

In  discussing  the  debt  histories  of  the  individual  nations,  we 
have  referred  at  times  to  the  prices  of  their  bonds.  It  is  not  always 
possible  to  correlate  closely  the  prices  of  government  bonds  with 
the  condition  of  the  national  finances  or  with  historical  events  of 
favorable  or  unfavorable  import.  The  effect  of  such  matters  on 
prices  for  a  series  of  years  is  modified  by  general  economic  or  finan- 
cial conditions,  by  the  relation  between  supply  and  demand  for  a 
country's  securities,  and  by  other  considerations.  It  must  be  borne 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS     75 


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76        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

in  mind  that,  aside  from  and  before  the  great  war,  there  have  been 
certain  factors  during  the  past  twelve  or  fifteen  years  which  have 
led  to  an  almost  steady  decline  in  the  prices  of  all  low  interest- 
bearing  securities.  Among  these  factors  may  be  mentioned  the 
increase  in  the  production  of  gold,  the  increase  in  the  cost  of  Uving 
and  in  the  scale  of  living,  and  the  output  of  enormous  amounts  of 
securities  of  all  kinds  coincident  with  rapid  industrial  expansion 
and  private  and  public  extravagance.  The  lowest  price  of  British 
consols  during  the  past  one  hundred  years  was,  however,  in  June, 
1815,  at  the  time  of  the  battle  of  Waterloo;  the  highest  was  on  July 
I,  1896,  at  a  time  when  England's  supremacy  in  almost  every 
respect  was  unquestioned  and  when  there  was  a  relatively  large 
accumulation  of  capital  in  Europe  seeking  investment.  The  lowest 
price  for  French  rentes  since  the  close  of  the  Napoleonic  wars 
occurred  in  the  troublous  days  of  the  Second  RepubUc  (1848),  and 
the  next  lowest  was  after  Sedan;  the  highest  price  was  in  1897, 
when  France  and  the  world  were  at  peace  and  capital  was  seek- 
ing investment  all  over  the  world.  The  lowest  prices  for  United 
States  bonds  since  the  early  days  of  the  Republic  were  in  the  spring 
and  early  summer  of  1861  at  the  beginning  of  the  Civil  War;  the 
highest  prices  as  a  rule  were  in  1902,  when  the  United  States  had 
greatly  extended  its  territory  as  a  result  of  the  Spanish  War,  was 
in  a  strong  economic  and  financial  condition,  and  when  there  was 
a  large  accumulation  of  capital  seeking  investment. 

It  remains  only  to  discuss,  as  far  as  it  can  be  seen,  the  effect  of 
the  present  great  war  on  national  credit.  In  number  of  men  en- 
Estimated  gaged,  population  and  resources  of  nations  at  war, 
pi'r^annum  of  ^^^  ^^tal  expenditure,  the  present  war  is  in  a  class  by 
present  War  itself.  An  early  estimate  of  the  London  "  Economist  "^ 
placed  the  direct  total  cost  of  this  war  for  six  months  for  the 
leading  countries  at  about  $8,232,000,000,  divided  somewhat  as 
follows:  — 

Germany about  $2,040,000,000 

Austria-Hungary "        1,440,000,000 

Russia "        2,040,000,000 

France "        1,560,000,000 

Great  Britain "        1,152,000,000 

^  Vol.  Lxxx,  pp.  50-51. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS     T] 

These  figures  were  at  the  rate  of  about  $16,464,000,000  as  the 
total  direct  cost  of  the  war  for  the  nations  listed  for  one  year.  Mr. 
Edgar  Crammond,  Secretary  of  the  Liverpool  Stock  Exchange,  at  a 


PRICES  OF   GOVERNMENT  BONDS  ^ 


Security 


United  States 

6%  1881 

4%  1907 

4%  1907 

4%  1925 

Great  Britain 

Consols  3% 

Consols  2|% 

Consols  2!% 

Consols  2i%8 

France 

Rentes  5% 

Rentes  3% 

Rentes  3% 

Rentes  3% 

Germany  * 
Prussian  consols  4%   . 
Prussian  consols  4%   . 
Prussian  consols  4%'. 
Prussian  consols  3i%  . 

Italy 

Rentes  5%' 

Rentes  s%  ' 

Rentes  s%  8 

Rentes  3i|%-3i%»... 

Austria-Hungary 

Austrian  rentes  4%. .  . 
Austrian  rentes  4%. . . 
Austrian  rentes  4%. .  . 
Austrian  rentes  4%. . . 

Russia 

Nicolai  4% 

Nicolai  4% 

Railroad  4% 

Rentes  4% 

Japan 

Sterling  4J  %  (ist  series) 


Period 


1873-1882 
1883-1892 
I 893-1 902 
1903-1912 


1873-1882 
1883-1892 
1893-1902 
1903-1912 


1873-1882 
1883-1892 
1893-1902 
1903-1912 


1873-1882  5 
1883-1892 
1893-1902 
I903-I9I2 


1873-1882 
1883-1892 
1893-1902 
I903-I912 


i873-i882>i) 
1883-1892 
1893-1902 
1903-1912 


1873-1882 
1883-1892 
1893-1902 
1903-1912 


1903-1912 


High 


i.S3% 
2.08% 
1.58% 
1-93% 


2.9s  % 
2-53% 
1-95%' 
2.66% 


4.24% 
3-03% 
2.86% 
2.98% 


3-88% 
3.76% 
3.79% 
3.48% 


4-70% 
4.36% 
3-94% 
3.84% 


4-8s% 
4-14% 
3.81% 
3.93% 


4.64% 
4.06% 
3-76% 
3.99% 


4.83% 


Date 


June  16,  1876 
March  29,1889 
March  14,  1902 
October  13,1905 

May  24,  1881 
March  29,  1888 
July  I,  1896 
January  5,  1903 

May  14,  1881 
September  13,  185 
July  22,  1897 
January  12,  1903 


December  7,  iS 
June  17,  1893 
April  17,  1903 


June  8,  1881 
December  3,  1886 
December  24,  1902 
June  I,  1905 


May  9,  1881 
September  30,  1892 
September  6,  1897 
June  26,  1903 


September  21,  1875 
February  13,  1891 
August  18,  1896 
June  2,  1903 


April,  1910 


Low 


Date 


4-50% 
2.94% 
3-39% 


3-34% 
2-95% 
3-03% 
3-45% 


4-9S% 

4-05% 
3.20% 
3.40% 


4-13% 
4.09% 
3-86% 
4-13% 


7.80% 
5.08% 
6.05% 
3.86% 


6.11% 

5-os% 
4-30% 
4-71% 


6.49% 

5-48% 
4.28% 
S.89% 


6.10% 


October  17,  1873 
June  23,  1884 
August  7,  1896 
June  IS,  1910 


December,  1874 
November  14,  1890 
July  IS,  1901 
October  14,  1912 


May  18,  1877 
December  17, 1883 
January  4,  1893 
October  8,  191 2 


October  2,  1900 
December  19,  1912 


1873 

January  23,  1883 
January  18,  1894 
May  3,  1912 


June  17,  1879 
January  5,  1883 
November  13,  1893 
October  5,  1912 


April  23,  1877 
January  13,  1883 
January  11,  1893 
August  19,  1907 


October,  1907 


1  Highest  and  lowest  prices  for  United  States  bonds  taken  from  the  Financial  Review  (New  York,  1914), 
pp.  83  to  87,  and  from  the  Commercial  and  Financial  Chronicle  (New  York),  vol.  xvii,  p.  621,  vol.  xxrv,  p. 
S,  vol.  xxxvin,  p.  7S7,  vol.  XLvm,  p.  421,  vol.  Lxm,  p.  217,  vol.  lxxiv,  p.  562,  vol.  lxxxi,  p.  iiS4,  vol. 
Lxxxx,  p.  IS96. 

Highest  and  lowest  prices  and  yields  for  foreign  government  bonds,  except  Japanese,  furnished  by 
Messrs.  F.  C.  Mathieson  &  Sons,  London,  England. 

Highest  and  lowest  prices  for  Japanese  government  bonds  from  the  Financial  Review  (New  York,  1912), 

I  A'lS^,'"^  ^°''  '°^^  'f  redeemed  at  due  date  (1923)  at  par  and  for  reduction  of  interest  in  1903. 
'  2j%from  April,  1903. 

•  In  view  of  the  fact  that  the  credit  of  Prussia  and  of  the  German  Empire  has  been  very  much  the  same, 
and  that  reliable  quotations  for  Prussian  securities  covering  a  fairly  long  period  are  more  easily  obtainable 
than  for  German  imperial  bonds,  we  have  used  the  Prussian  consols  table. 

'  Prices  from  1880  to  1882  only.  «  From  1898,  3§%. 

I  ^i^'r*^  13.20%  of  income  tax.  8  5%  less  2o7o  of  income  tax. 

*  31%  from  January,  191 2.  10  1879  to  1882  only. 


78        AMERICAN  AND  FOREIGN  INVESTMENT   BONDS 

meeting  of  the  Royal  Statistical  Society,  March  i6,  191 5,  esti- 
mated the  direct  costs  for  one  full  year  of  war  as  follows :  ^ 

Great  Britain about  $3,398,400,000 

France "        2,656,320,000 

Germany "        4,502,400,000 

Austria-Hungary "        2,697,600,000 

Russia "        2,880,000,000 

These  figures  show  a  total  direct  cost  for  one  year  of  war  to 
the  leading  nations  involved  of  $16,134,720,000.  The  London 
"Statist"  ^  has  given  the  probable  cost  of  the  first  twelve  months 
of  war  for  Great  Britain  as  about  $3,192,000,000.  The  cost  of  the 
first  twelve  months  of  war  for  France  probably  will  be  in  the  neigh- 
borhood of  $3,500,000,000.^  Perhaps  it  is  not  far  wrong  to  say  that 
the  cost  of  the  war  for  the  first  twelve  months  to  the  leading  na- 
tions involved  will  be  in  the  neighborhood  of  from  $16,000,000,000 
to  $17,000,000,000.  The  figures  probably  need  not  be  modified 
much  from  the  above  to  take  care  of  the  short  participation  of 
Italy  during  the  period  covered.  The  costs  have  been  steadily 
rising,  however,  until  the  latest  estimates  for  Great  Britain  —  by 
Premier  Asquith,  September  15,  1915  —  figure  out  a  net  war  ex- 
penditure, exclusive  of  loans  to  allies  and  certain  other  items,  of 
about  $16,800,000  a  day,  or  at  the  rate  of  $6,132,000,000  a  year, 
and  a  gross  war  expenditure,  including  loans  to  her  aUies,  of  about 
$20,160,000  a  day,  or  say  $7,358,400,000  a  year;  ^  the  monthly  war 
costs  of  France,  according  to  the  French  Budget  Commission,  have 
been  running  at  the  rate  of  about  $397,440,000  a  month,  or  say 
$4,769,280,000  a  year,  and  the  vote  of  credit,  asked  by  M.  Ribot 
September  16  for  the  last  quarter  of  191 5,  was  substantially  on  this 
basis;  ^  the  average  monthly  cost  to  Russia  is  given  by  M.  Ribot, 
speaking  on  the  same  date,  as  about  $345,600,000,  or  at  the 
rate  of  $4,147,200,000  a  year;®  the  monthly  war  expenditures 

*  Journal  of  the  Royal  Statistical  Society  (London),  vol.  Lxxviii  (May,  19 15), 
pp.  361-413- 

2  Vol.  Lxxxrv,  p.  664.  For  later  figures,  see  vol.  Lxxxv,  p.  99  (about  $3,600,000,000). 

3  Commercial  and  Financial  Chronicle  (New  York),  June  26,  1915,  p.  2117.  See  also 
statement  of  M.  Ribot  as  summarized  in  the  Statist  (London),  June  5,  1915,  vol. 
LXXxrv,  p.  571. 

*  Statist  (London),  September  18,  1915,  vol.  lxxxv,  p.  447. 

^  Commercial  and  Financial  Chronicle  (New  York),  September  25,  1915,  vol.  lOl, 
p.  969  and  Ibid.,  September  18,  1915,  p.  877. 

*  Commercial  and  Financial  Chronicle  (New  York),  vol.  loi,  p.  877. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    79 

of  Germany,  according  to  Herr  Helfferich,  Secretary  of  the  Im- 
perial Treasury,  in  his  speech  introducing  the  third  war  loan 
August  20,  191 5,  amount  to  about  $472,000,000,  or  at  the  rate  of 
say  $5,664,000,000  a  year.^  The  same  authority  estimates  the 
costs  to  all  the  nations  involved  at  nearly  $70,800,000  daily,  over 
$1,888,000,000  monthly,  and  about  $23,600,000,000  yearly.^  Allow- 
ing for  the  participation  of  Bulgaria  —  which  occurred  after  Herr 
Helfferich's  estimate  —  and  possibly  other  nations,  the  cost  of  the 
second  year  of  war  to  all  the  nations  involved  is  likely  to  be  in  the 
neighborhood  of  $25,000,000,000. 

These  figures  compare  with  the  estimated  cost  of  previous  wars 
somewhat  as  shown  in  the  table  on  page  80.^ 

To  this  we  may  add  about  $16,500,000,000  as  the  cost  of  the  first 
year  of  the  present  war  and  perhaps  $25,000,000,000  as  the  cost  of 
a  second  year. 

In  addition  to  the  direct  cost  of  maintaining  armies  and  carrying 
on  war,  there  is  the  economic  loss  through  cessation  of  production. 
This  has  been  estimated  by  M.  Guyot  and  the  London  "Econo- 
mist" for  the  first  sixmonths  of  the  war  as  about  $10,272,000,000,^ 
or  at  the  rate  of  $20,544,000,000  a  year.  Adding  this  to  the  direct 
cost,  we  get  a  figure  for  the  first  year  of  the  war  of  about  $37,000,- 
000,000.  If  we  allow  for  the  value  of  lost  lives,  on  the 
basis  of  M.  Guyot's  figures  (about  $4,646,400,000  for   th^ewarto^° 
SLX  months),  we  find  total  losses  for  a  year  of  over   ^^^^ 
$46,000,000,000.  This  is  "without  allowing  for  the  devastation  and 
widespread  destruction  of  fixed  capital."  ^  The  total  losses  to  July 
31,  191 5,  as  estimated  by  Mr.  Crammond,  are  as  follows:  — 

Great  Britain $6,038,400,000 

Germany 13,320,000,000 

Belgium,  including  destruction  of  property . . .  2,527,200,000 
France,  including  destruction  of  property.  .  .  8,094,720,000 
Austria-Hungary,    including    destruction    of 

property 7,622,400,000 

Russia,  including  destruction  of  property ....       7,219,200,000 

A  total  for  the  six  nations  of  about $44,821,920,000^ 

1  Economist  (London),  September  4,  1915,  vol.  lxxxi,  p.  358.        2  /^/^^  p_  ^g^^ 
3  World  Almanac  (1915),  p.  488.   See  also  Mulhall  (1899),  P-  586,  and  Whitaker's 
Almanack  (1915),  p.  800.  All  such  figures  should  be  thought  of  as  approximations  only. 
^  Economist  (London),  vol.  lxxx,  p.  51.  b  /j/j.^  p,  ^i_ 

^  Journal  of  the  Royal  Statistical  Society,  May,  1915,  pp.  361-413.    For  another  esti- 


80        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

The  "Economist"  estimated  the  direct  costs  to  all  the  nations 
involved  as  about  43%  and  the  total  costs  as  about  96%  of  the 
national  income  or  earnings.  Strictly  speaking,  total  loss  occa- 
sioned by  a  war  like  the  present  one  is  incalculable.  Such  things 
cannot  properly  be  measured  in  figures.  It  should  be  borne  in 
mind  that  a  very  large  part  of  the  cost  of  war  is  represented  by 
expenditures  of  the  entire  nation  through  the  Government;  and 


GROSS  COST  OF  PAST  WARS  FROM   1 793-1913  —  PUBLIC 

FIGURES  1 


Dates 

Countries  engaged 

Cost 

1793-1815.... 
1812-1815.... 
1828         

England  and  France 
France  and  Russia 
Russia  and  Turkey 
Spain  and  Portugal  (civil) 
France  and  Algeria 
Revolts  in  Europe 
'  England 
France 

■  Sardinia  and  Turkey 
Austria 

Russia 
'  France 

■  Austria 
. Italy 

United  States  (civil  war) 

Denmark,  Prussia  and  Austria 

Prussia  and  Austria 

Brazil,  Argentina  and  Paraguay 

France  and  Mexico 
j  France 
1  Germany 
j  Russia 
\  Turkey 

Spain  and  United  States 

England  and  Transvaal 

Russia  and  Japan 

Italy  and  Turkey 

Balkan  Wars 

$6,250,000,000 
450,625,000 
100,000,000 

1830-1840 

1830-1847.... 
1848 

250,000,000 

190,000,000 

50,000,000 

1854-1856.... 
iSi^o  

371,000,000 
332,000,000 
128,000,000 

68,600,000 
800,000,000 

75,000,000 
127,000,000 

1861-1865.... 
1864 

51,000,000 

5,000,000,000 

36,000,000 

1866 

330,000,000 

1864-1870 

1865-1866.... 

1870-1871 

1876-1877.... 
1898 

240,000,000 

65,000,000 

1,580,000,000 

954,000,000 

806,547,489 

403,273,745 
1,165,000,000 

1900-1901 .... 

1904-1905 

1911 

1,000,100,000 

2,500,000,000 

700,000,000 

1912-1913 

1,192,130,000 

Expense  of  wars,  1 790-1 860. 
Expense  of  wars,  1861-1913 . 


$9,243,225,000 

15,972,051,234 

Total $25,215,276,234 


mate  of  the  direct  costs  and  total  losses,  see  Charles  F.  Speare,  "What  the  War  is 
Costing  Europe,"  American  Review  of  Reviews,  April,  1915,  p.  452. 

1  In  the  case  of  the  Balkan  Wars,  estimates  are  from  bankers'  statements,    (See 
World  Almanac,  p.  488.) 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    8 1 

that  a  great  portion  of  this  would  be  incurred  in  times  of  peace  by 
the  nation  as  individuals.^  In  other  words,  a  large  part  of  the  cost 
of  war,  instead  of  being  a  true  addition  to  expenditure,  is  merely  a 
transference  of  expenditure  from  individuals  to  the  Government. 
On  the  other  hand,  the  activities  of  individuals  in  war  are  destruc- 
tive, whereas  in  peace  they  are  or  should  be  constructive.  Again, 
during  and  after  a  great  war  the  people  are  induced  to  practice 
economies  which  in  ordinary  times  they  would  be  likely  to  neglect. 
Taking  a  still  larger  view,  there  is  often  a  physical  and  moral  regen- 
eration brought  about  by  the  occurrence  of  a  terrible  war.  So  it 
will  not  do  to  assume  that  war  is  all  waste  —  that  the  "cost"  is  all 
loss.  The  population  of  Germany  in  the  Thirty  Years'  War  was 
reduced  from  about  16,000,000  to  about  4,000,000.^  Before  the 
present  war  it  was  probably  70,000,000.  The  greatest  prosperity 
of  England  developed  after  the  Napoleonic  wars.  So  also  it  was 
with  our  own  American  Civil  War.  There  is  a  regeneration  that 
nature  provides.  Wounds  heal  —  as  a  rule  they  can  hardly  be 
prevented  from  healing.  The  grass  that  is  burned  in  the  early 
spring  is  replaced  with  new  grass  greener  and  more  lovely.  So 
economists  have  figured  out  how  the  great  losses  of  the  present 
war  ultimately  may  be  replaced.  They  will  constitute  a  serious 
burden  and  a  serious  problem,  however,  for  many  years  to 
come. 

The  direct  costs  of  the  war  have  been  financed  largely  through 
borrowings.   Undoubtedly  a  large  amount  of  paper 
money  has  been  issued  —  the  convertibiHty  of  some  of 
which  remains  to  be  proved.    The  war  debts,^  according  to  the 

'  For  an  interesting  article  on  these  phases  of  the  cost  of  the  war,  see  Roland 
G.  Usher,  "  The  Cost  of  the  War,"  in  the  Atlantic  Monthly,  June,  1915,  p.  847. 

*  Price  ColUer,  Germany  and  the  Germans,  p.  30. 

'  The  Boston  Evening  News  Bureau,  September  20,  1915,  has  given  the  war  debts, 
exclusive  of  bank  loans,  as  follows:* 

ALLIED  LOANS 
Great  Britain  — 

si  per  cents  at  95  on  3-97%  basis $1,750,000,000 

4i  per  cents  on  4.58%  basis  (new  loan) 2,925,000,000 

Treasury  bills,  i|%  .o  3!% 7oo,ooo,ooot 

Five-year  Exchequer  3  per  cents 239,000,000 

Canadian  ten-year  4^  per  cents  in  London 25,000,000 

Canadian  one-  and  two-year  5  per  cents  in  New  York 45.000,000 

Indian  Government  4%  domestic  loan 15,000,000 

Anglo-French  loan  in  the  United  States 250,000,000 

Total $5,949,000,000 

•  This  list  of  loans  has  been  corrected  from  other  soiirces  to  October  23,  1915- 
t  Estimated. 


82        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

London  "Statist"  of  October  23,  1915  (vol.  lxxxvi,  pp.  182-86), 
up  to  about  that  time,  were  as  follows :  — 

WAR  DEBT* 

Great  Britain  — 

November,  1914,  3^%  war  loan $1,680,000,000 

March,  1915,  3%  exchequer  bonds,  net 161,280,000 

July,  1915,  42%  war  loan 2,808,000,000 

October,  1915,  5%  American  loan 250,000,000 

Treasury  bills 1,027,200,000 

Total  war  debt $5,926,480,000 

France  — ■ 

National  defense  bonds $1,230,000,000 

Treasury  bonds 450,000,000 

One-year  5%  notes  in  London 50,000,000 

One-year  5  9c  notes  in  New  York 30,ooo,ooot 

Collateral  loan  in  New  York 43,000,000 

Credit  in  New  York  (1914) 10,000,000 

Credit  in  New  York  (1915) 20,000,000 

Anglo-French  loan  in  the  United  States 250,000,000 

Total $2,083,000,000 

Russia  — 

5  per  cents  at  94  on  5.33%  basis $257,500,000 

Second  internal  loan 257,500,000 

Third  internal  loan  five-year  si  per  cents 515,000,000 

Four  per  cent  bonds 309,000,000 

Treasury  bills 979,500,000 

Issues  in  England  and  France 277 ,000,000 

Total $2,595,500,000 

Italy  — 

Twenty-five-year  4J  per  cents $200,000,000 

Twenty-five-year  4!  per  cents  at  95 190,000,000 

One-year  notes  (United  States)  6% 25,000,000 

Total $415,000,000 

Grand  total  Allied  loans $11,042,500,000 

GERMAN  AND  AUSTRIAN  LOANS 

Germany  — 

First  war  loan,  s  per  cents  at  97^  on  5.32%  basis $1,115,000,000 

Second  loan,  s  per  cents  at  983 2,265,000,000 

Third  loan  at  gg 3,000,000,000 

Nine  months'  notes  in  United  States 10,000,000 

Total $6,390,000,000 

Auslria-Bungary  — 

Austrian  Sj  per  cents  at  975  on  6.10%  basis $433,000,000 

Hungarian  6  per  cents  at  97  J  on  6.70%  basis 237,000,000 

Second  war  loan  to  June  25 900,000,000 

Loan  from  German  bankers 76,000,000 

Second  loan  in  Germany 125 ,000,000 

Credit  in  Germany 60,000,000 

Total $1,831,000,000 

Turkey  — 
Loan  in  Germany $250,000,000 

Total  of  German  loans $8,471,000,000 

Grand  total  of  all  belligerent  loans $19,513,500,000 

*  Reduced  at  the  rate  of  $4.80  to  the  pound  sterling, 
t  Estimated. 

(For  third  German  loan,  see  Commercial  and  Financial  Chronicle  [New  York],  vol.  loi,  p.  1055, 
and  for  Italian  6%  loan,  see  ibid.,  p.  1327-) 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    83 

France  — 

Advances  from  the  Bank  of  France « ^ 

French  treasury  bonds  discounted  by  Bank 'of  France' in  order"  to  '^'^'°°°'°°° 

make  advances  to  foreign  Governments .„.  .a 

3l%  loan  of  July,  1914 101,760,000 

Bon  de  la  Defense  Nationale..           96,000,000 

Obligation  de  la  Defense  Nationale. .          1,511,232,000 

Loan  from  England....                            430,272,000 

Loan  from  America . .        240,000,000 

250,000,000 

Total  sum  borrowed  by  France  for  the  war $3,973,264,000 

Russia  — 

5%  short-term  treasury  bonds  placed  with  State  Bank $1  204  ^6^  000 

5%  long-term  loans '  ^'^'-^''^^.wo 

Short-term  bonds  placed  in  England 1,013,200,000 

Short-term  bonds  placed  in  France. . .      !S'f°'°°° 

Treasury  biUs,  etc. 11/"^'''°° 

668,712,000 

Total ~ 

#3,546,200,000 

Italy  — 

December,  19 14,  4^%  ban e 

July,  1915,  5%  loan.' $192,000,000 

Loan  from  Bank  of  Italy..  192,000,000 

233,593,200 

Total  war  debt ~I7  ' 

$617,539,200 

Germany  — 

September,  1914,  5%  war  stock «;o,,  ,,, 

September,  1914,  5%  treasury  bonds ." 2  6  000  o^ 

February,  1915,5%  war  stock 2  lllZZ^ 

September,  1915,  5%  war  loan Atit' 

Treasury  bills  (approximate) . .                             2,855,836,000 

^         1,015,744,000 

Total  war  credit  obtained aT"! 

*7,ooo,ooo,ooo 

Austria-Hungary  — 

November,  1914,  ist  Austrian  sl%  war  loan $,  ,0  „„o  ,^ 

Valuta  loan  from  Germany  .                                        $459,998,4oo 

November,  1914,  Hungarian  6%  war  loan.'. '. .' .' .' .' .' .' '.'.'.'.'.'..[ 2C  000  000 

May,  1915,  2d  Austrian  war  loan ....                                   234000,000 

June,  191S,  2d  Hungarian  war  loan. fS'f  S    °° 

June,  1915,  2d  loan  from  German  bankers .'.'.'.".'!.'.*.'.' .' .' .' .'  73,200,000 

Total  publicly  issued  debt. .  7~7  ' 

Estimated  floating  debt. .  $1,619,995,200 

1,022,400,000 

Estimated  total  to  September  30 $2,642,395,200 

These  figures  show  total  war  loans  for  the  Allies  of  $14  063  - 
483,200  and  for  Germany  and  Austria-Hungary  of  $9,722,395  2o<^ 
or  a  total  of  $23,785,878,400.  The  figures  include  advances  by  the 


84        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

great  central  banks  to  the  Governments  for  war  purposes.  France 
and  Russia  particularly  have  financed  their  war  costs  to  a  great 
extent  through  the  central  banks.  As  in  the  war  of  1870,  France 
has  leaned  heavily  on  the  Bank  of  France.^ 

It  is  hardly  worth  while  to  attempt  to  make  any  definite  state- 
ments as  to  the  total  present  debts  of  the  leading  nations  engaged  in 
this  war.  When  the  war  is  ended,  it  will  be  possible  to  figure  with 
some  accuracy  the  net  additions  to  the  various  national  debts,  to 
figure  the  debts  per  capita,  and  to  estimate  the  proportion  between 
total  debts  and  wealth  and  between  debt  charges  and  national 
income.  Sufl&ce  it  to  say,  that  already,  in  October,  191 5,  the  na- 
tional debts  of  the  principal  belligerents  as  a  whole  probably  have 
doubled.^  The  debts  of  some  of  the  nations  at  war  have  more  than 
doubled.  Chancellor  of  the  Exchequer  McKenna  in  introducing 
the  budget  estimated  the  dead-weight  debt  of  the  United  Kingdom 
March  31,  1916,  as  likely  to  be  £2,200,000,000  ($10,560,000,000).^ 
This  would  be  an  increase  of  over  two  hundred  per  cent  above  the 
debt  in  191 2.  The  debt  of  Germany  already  has  received  an  addi- 
tion of  30,000,000,000  marks  ^  (October,  1915),  or  say  $7,080,000,- 
000  —  a  war  increase  alone  over  our  figures  for  191 2  of  about  one 
hundred  and  forty-five  per  cent.  All  these  great  increases  in  debt, 
of  course,  are  for  what  have  been  called  unproductive  purposes 
—  that  is,  for  war.  The  war  loans  constitute  a  staggering  addition 
to  the  dead-weight  debts  of  the  nations  concerned.^ 

How  heavy  will  be  the  burdens  of  these  huge  debts  after  the  war 
will  depend  in  large  measure  on  the  terms  of  peace  and  on  the 
Possible  basis  course  the  indebted  nations  pursue  after  the  war. 
of  peace  -^g  ^jq  ^^^  j^g^g  discuss  the  various  suggested  terms 

^  For  figures  of  bank-note  expansion,  gold-holdings,  and  assets  and  liabilities  of  the 
banks,  see  the  Statist,  October  23,  1915,  vol.  Lxxxvi,  pp.  182-86.  In  France,  Germany, 
and  Russia  the  convertibility  of  the  paper  currency  has  been  suspended.  {Economist 
[London],  July  10,  1915,  vol.  Lxxxi,  p.  47.) 

2  The  loans  of  the  nations  at  war  from  the  beginning  of  the  Balkan  wars,  October  8, 
1912,  up  to  the  outbreak  of  the  European  war,  July  30,  1914,  were,  according  to  the 
Boston  News  Bureau,  $830,000,000.  Of  this  Germany  and  Austria  borrowed  $489,- 
000,000  and  France,  Servia,  and  Belgium  $341,000,000.  {Boston  News  Bureau, 
October  9,  1914.) 

3  Economist  (London),  vol.  lxxxi,  p.  463.  *  Ibid.,  p.  358. 

'  The  net  debt  of  the  United  States  August  31,  1915,  was  $1,119,376,669 — or 
$92,690,643  more  than  in  1912.  {Commercial  and  Financial  Chronicle  [New  York], 
vol.  loi,  p.  989.) 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    85 

of  peace  —  such  as  the  restoration  of  Alsace-Lorraine,  the  creation 
of  an  autonomous  Poland  and  other  matters  of  this  kind.  What- 
ever indemnities  are  paid  will  add  just  so  much  to  the  burden  of  the 
nation  or  nations  paying  them  and  take  away  just  so  much  from 
the  burdens  of  the  nations  receiving  them.  So  also  will  any  losses 
or  acquisitions  of  territory  increase  or  lessen  the  burdens  of  the 
debts.  From  a  financial  point  of  view,  what  is  essential,  however,  is 
that  the  peace  shall  be,  as  far  as  possible,  lasting,  —  that  it  shall 
make  impossible  a  recurrence  in  the  near  future  of  any  such  catas- 
trophe as  we  are  witnessing.  Otherwise  discussion  of  national 
solvency  is  a  waste  of  time.  In  order  to  make  a  lasting  peace,  it 
would  seem  that  boundaries  should  be  rectified  on  the  basis  of 
nationaHties  or,  perhaps  we  may  say,  of  races.  In  this  connection 
there  are  many  questions  to  be  settled  involving  the  present  do- 
minions of  Austria-Hungary.  Let  us  hope  that  there  will  be  no 
effort  to  crush  any  nation  or  people  —  even  though  that  nation 
temporarily  may  have  offended  against  all  the  laws  of  civilization. 
Yet  no  peace  will  be  a  peace  unless  so-called  militarism  is  done 
away  with.  Expenses  for  military  preparation  must  be  reduced 
largely  and  the  energies  of  mankind  devoted  to  productive  pur- 
poses. All  sorts  of  programmes  have  been  suggested  —  including 
that  of  a  United  States  of  Europe  with  an  international  military 
and  naval  force  to  maintain  order  and  enforce  peace. ^  Undoubt- 
edly, with  the  backing  of  the  laboring  classes  and  the  Socialists 
in  many  countries,  a  tremendous  effort  will  be  made  to  bring  about 
the  settlement  of  as  many  disputes  as  possible  through  arbitration. 
There  will  be  also  —  it  is  evident  already  —  a  tremendous  move- 
ment toward  democracy  and  liberal  institutions.^  Some  such  solu- 
tion would  seem  to  be  essential  to  continued  national  solvency  and 
national  good  faith. 

If  Baxter  in  1874  was  alarmed  at  the  rate  at  which  nations  were 
borrowing  and  feared  then  for  the  solvency  of  some  of  them,^  what 

^  Dr.  Nicholas  Murray  Butler  in  the  Boston  Sunday  Herald,  October  18,  1914,  and 
meeting  of  the  League  of  Peace  in  Independence  Hall,  Friday,  June  17,  1915.  {Boston 
Evening  Transcript,  June  17,  1915.)  See  also  Society  to  Eliminate  Economic  Causes 
of  War.   {Commercial  and  Financial  Chronicle  [New  York],  vol.  100,  p.  2134.) 

^  The  immunity  of  private  property  at  sea  in  time  of  war,  or  even  the  neutraUzation 
of  all  commerce,  are  subjects  of  great  interest  and  importance.  (See  the  Eventing  Post, 
New  York,  August  10,  1915.) 
^    '  Journal  of  the  Royal  Statistical  Society,  vol.  xxxvn,  pp.  11- 13. 


86        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

shall  we  say  in  191 5  with  debts  piling  up  at  unheard-of  rates  and 

Reduced  ex  ^^^^  ^^^  ^^^  ^^^  ^^^  ^^  sight?  ^  It  IS  hard  to  escape 
penditures  the  conclusion  that  after  the  war  most  of  the  nations 

for  national  engaged  will  be  forced  either  (i)  to  reduce  their  ex- 
so  vency  penscs  f  or  armaments  materially  in  order  to  pay  inter- 

est on  their  debts  or  (2)  to  compromise  or  repudiate  at  least  a  portion 
of  their  obligations.  The  debt  histories  which  we  have  given  show 
that  such  things  are  not  unheard  of.  There  has  been  during  the  past 
one  hundred  years,  of  course,  an  enormous  increase  in  the  wealth 
of  the  leading  nations  at  war.  For  instance,  the  burden  of  the  Brit- 
ish debt,  on  the  basis  of  debt  to  wealth,  even  with  the  great  addi- 
tions to  date  for  war,  is  less  than  one  third  as  great  as  in  181 6. 
Great  Britain  could  fight  between  three  and  four  years  more  with- 
out making  her  debt  bear  a  larger  proportion  to  her  resources  than 
it  did  after  the  Napoleonic  wars.^  At  the  same  time  there  is  a  limit. 
There  is  less  reason  to  think  that  her  resources  will  increase  at  the 
rate  they  did  in  the  earlier  period.  We  can  apply  the  same  sort  of 
tests  to  the  other  nations  at  war.  Then  there  is  another  considera- 
tion. Whenever  there  is  a  crushing  burden  of  debt  or  of  taxation,  — 
especially  if  those  burdens  have  failed  to  produce  any  correspond- 
ing benefit,  —  the  temptation  to  compromise  is  very  strong.  It  is 
then  that  the  stuff  of  which  nations  are  made  is  revealed.  Con- 
tinued expenditures  for  miHtary  purposes  at  the  rate  which  has 
prevailed  during  the  past  thirty  years, ^  however,  added  to  the 
charges  on  the  debts  created  through  this  war,  are  likely  to  lead  to 
bankruptcy.  It  is  a  grave  question,  of  course,  whether  in  the  cases 
of  some  nations  bankruptcy  can  be  avoided  under  any  circum- 
stances. 

We  will  not  undertake  to  estimate  the  relative  credit  and  stand- 
ing of  the  various  nations  after  the  war.  Such  a  task  is  impossible 
until  one  sees  more  clearly  what  the  outcome  of  the  war  is  to  be. 

1  Some  decisive  military  action,  inability  to  borrow,  inability  to  pay  interest  on 
existing  debts,  or  general  economic  exhaustion  may  bring  the  war  to  an  end. 

2  For  an  interesting  article  on  this  phase  of  the  subject,  see  "Will  the  War  Bankrupt 
Europe?"  in  the  North  American  Review,  August,  1915,  p.  174. 

^  Between  1881  and  1911,  the  combined  annual  expenditure  for  army  and  navy 
of  the  five  great  European  nations  —  Great  Britain,  France,  Germany,  Austria- 
Hungary,  and  Russia  —  much  more  than  doubled,  showing  a  far  higher  rate  of  in- 
crease than  the  respective  national  incomes.  {Economist  [London],  vol.  Lxxrx,  pp. 
556  and  914.) 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    87 

It  would  seem,  however,  that  the  United  States,  Russia,  and  Japan 
would  emerge  from  the  war  relatively  less  weakened 
than  any  other  nations.  The  United  States  and  Rus-   nations  after 
sia,  on  account  of  the  continental  nature  of  their 
territory,  the  size  and  character  of  their  population,  and  the  im- 
mensity of  their  resources,  developed  and  undeveloped,  are  in  an 
enviable  position.   Japan  has  not  been  placed  under  the  burdens 
that  some  of  the  other  nations  have  been;  and  it  may  succeed  in 
developing  its  material  interests  in  Korea  and  China  on  a  scale 
which  will  greatly  enhance  its  credit.   It  is  a  law  of  nature  never 
violated  that  the  leadership  of  nations  goes  to  the  strongest  —  that 
is,  the  strongest  in  a  broad  sense.  Is  it  too  much  to  expect  that  the 
United  States  after  the  war  will  be  in  a  position  to  assume  the 
leadership  which  has  been  held  for  a  hundred  years  by  Great 
Britain? 

Until  the  effect  of  the  present  war  on  the  debts  and  financial 
condition  of  the  nations  engaged  becomes  clearer,  American  inves- 
tors should  exercise  great  care  in  the  purchase  of   proper  attitude 
foreign  government  bonds.   Mr.  Mortimer  L.  Schiff,   ^^  American  in- 

°      "  .  ,     '    vestors  toward 

a  well-known  New  York  banker,  is  quoted  as  saying  foreign  govem- 
in  substance:  that  an  investor  should  be  assured  that 
a  borrowing  country  is  administered  economically;  that  in  its 
annual  budget,  income  and  expenditures  balance,  and  that  the 
proceeds  of  any  loan  applied  for  are  to  be  used  for  productive  pur- 
poses; that  from  the  point  of  view  of  the  investor  dreadnoughts 
and  rifles  are  not  good  security;  that  a  country  should  provide 
out  of  its  own  budget,  through  taxation  of  its  own  people  or  from 
internal  loans,  for  everything  that  may  be  called  its  non-produc- 
tive expenditures,  and  that  it  should  restrict  its  foreign  borrow- 
ing to  such  productive  purposes  as  railroads,  irrigation  schemes, 
and  such  others  as  may  be  self-supporting;  that  in  financing 
productive  enterprises  in  foreign  countries,  the  most  acceptable 
form  of  security  would  be  a  bond  having  a  direct  lien  or  mortgage 
on  the  enterprise  itself  and  guaranteed  by  endorsement  by  the 
Government,  rather  than  a  simple  government  obligation;  that  a 
definite  pledge  for  the  service  of  the  loan  of  all  or  a  portion  of  some 
definite  form  of  governmental  revenue  would  be  of  advantage;  that 
foreign  loans  placed  in  this  country  should  bear,  if  possible,  a  defi- 


88        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

nite  relation  to  trade  with  this  country;  that,  as  a  general  rule, 
short-term  securities  should  be  avoided,  but  a  redemption  provision 
should  be  embodied  in  every  long-time  bond ;  that  a  sinking  fund, 
if  possible,  should  be  provided;  and  that  in  general  the  obligation 
should  be  of  such  a  character  as  to  be  not  too  great  a  burden  on  the 
borrower  —  lest  defaults  become  necessary.^  These  suggestions 
have  much  of  value.  Until  the  Governments  involved  in  this  war 
have  shown  their  ability  to  maintain  solvency,  Americans  should 
exercise  the  greatest  care  in  the  purchase  of  their  securities. 

Illustrating  not  only  certain  principles  stated  by  Mr.  Schiff,  but 
in  a  broad  way  everything  discussed  in  this  chapter,  is  the  $500,000- 
Angio-French  ooo  Anglo-Frcnch  loan  brought  out  in  September  and 
doUarioan  Qctober,  1915.  TWs  loan  was  in  the  form  of  a  joint 

and  several  obligation  of  the  United  Kingdom  of  Great  Britain  and 
Ireland  and  the  French  Republic.  It  bore  5%  interest  and  matured 
in  five  years,  but  was  convertible  at  any  time  up  to  maturity  into 
joint  4|%  bonds  due  in  1940,  but  redeemable  at  the  option  of  the 
borrowing  nations  after  1930.  The  loan  was  made  payable  in 
American  gold  dollars,  and  was  brought  out  at  a  price  and  under 
conditions  calculated  to  insure  its  wide  distribution  among  the 
American  investing  public. 

In  several  respects,  this  loan  was  unique.  It  was  the  largest  bond 
issue  of  any  kind  ever  brought  out  at  one  time  in  the  United  States. 
It  was  the  first  large  loan  made  by  the  people  of  the  United  States 
to  foreign  nations.  It  was,  moreover,  the  first  external  issue  ever 
put  out  by  Great  Britain.  And  it  was,  so  far  as  we  know,  the  first 
joint  and  several  obligation  of  two  great  powers. 

Yet  fundamentally  this  loan  was  an  ordinary  transaction  and 
grew  out  of  conditions  which  we  have  discussed  at  length  in  this 
chapter.  In  its  origin  the  loan  was  part  of  a  commercial  transac- 
tion. Great  Britain  and  France  under  war  conditions  had  been 
and  were  importing  from  this  country  such  a  large  excess  of  mer- 
chandise 2  that  they  were  unable  to  pay  for  it  conveniently  with 
American  securities  or  with  gold.  In  spite  of  holdings,  by  the  Eng- 
lish and  French  people,  of  American  securities  many  times  the 

^  Annalist  (New  York),  May  31,  1915,  p.  552,  and  Commercial  and  Financial 
Chronicle  (New  York),  May  29,  1915,  p.  1801. 

2  Their  income  from  expenditures  by  Americans  abroad  also  had  been  reduced 
greatly. 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    89 

amount  of  the  loan  sought,  these  securities  were  not  available 
immediately  to  pay  for  goods.  Moderate  amounts  of  such  securities 
had  been  shipped  to  this  side,  to  be  sure,  almost  every  week.  But 
English  and  French  investors  ever  since  the  beginning  of  the  war 
had  shown  a  reluctance  to  part  with  their  American  securities. 
Earlier  in  this  chapter  we  called  attention  to  the  fact  that  during 
a  whole  year  of  war  all  Europe  had  sold  back  to  us  only  between 
$300,000,000  and  $500,000,000  of  our  securities.  This  explains  in- 
cidentally why  the  deposit  of  American  securities  as  collateral  for 
such  a  large  loan  was  out  of  the  question.  ^  As  for  shipments  of  gold 
by  Great  Britain  and  France  to  pay  for  their  huge  debit  balance  to 
this  country,  this  method  —  even  if  we  allow  that  it  were  possible 
—  would  have  been  a  clumsy,  an  uimecessary,  and  an  undesirable 
way.  Considerable  amounts  of  gold,  as  well  as  American  securities, 
had  been  and  were  being  shipped  to  this  country.  But  the  English 
and  the  French  needed  the  gold  badly  to  support  their  banking 
structures  in  time  of  war  and  to  make  purchases  which  they  could 
not  pay  for  otherwise.  It  happened  that  we  did  not  need  the  gold 
at  all.  We  had  already  what  might  be  called  "an  uncomfortable 
excess."  So  the  English  and  the  French  arranged  to  buy  of  us  and 
we  to  sell  to  them  the  goods  they  needed  on  credit.  The  loan  was 
called  and  was  a  "credit"  loan  —  "credit"  meaning  here  a  "com- 
mercial credit."  It  estabhshed  a  convenient  method  for  Great 
Britain  and  France  to  pay  for  wheat,  cotton,  manufactures,  and 
other  goods  ^  imported  from  the  United  States;  and  from  an  Ameri- 
can point  of  view,  it  made  possible  the  marketing  with  two  of  our 
best  regular  customers  of  an  unusually  large  amount  of  the  prod- 
ucts of  our  farms  and  factories.  In  other  words,  it  did  for  us  what 
the  loans  of  Great  Britain  to  other  countries  for  the  past  hundred 
years  had  done  —  it  financed  our  trade. 

From  the  investor's  point  of  view,  the  loan  was  safe  and  at- 
tractive. The  yield  —  5I  %  to  5I  %  —  was  high  and  the  security 

1^  The  English  and  French  might  have  been  taxed  or  otherwise  forced  out  of  holding 
their  American  securities,  but  measures  like  this  would  have  been  harsh  and  unde- 
sirable. 

2  Probably  only  a  small  part,  if  any,  of  the  loan  was  used  to  purchase  so-called 
"munitions."  Such  use  of  the  specific  proceeds  of  the  loan  was  unnecessary.  Only  a 
relatively  small  part  of  our  exports  to  the  AlUes  were  "  munitions  of  war. "  In  the  minds 
of  American  investors,  complete  separation  of  "munitions"  from  the  loan  would  have 
had  a  beneficial  effect. 


90        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

ample;  for  —  to  speak  only  of  one  part  of  the  wealth  of  Great 
Britain  and  France  —  the  four  to  five  billion  of  American  securi- 
ties held  by  the  two  nations  were  an  asset  for  the  payment  of  their 
debt,  whether  they  sold  them  back  to  us  or  not.  Then,  again,  the 
loan  was  especially  safe  because  it  was  part  of  the  external  or  for- 
eign debt  of  the  two  countries  and  bore  a  small  proportion  to  their 
domestic  debt.  For  while  there  is  no  such  thing  as  a  "  first  mortgage 
on  the  British  Empire,"  or  even  a  first  lien  in  any  legal  sense,  yet  it 
is  a  fact  that  all  nations  —  even  nations  with  records  for  repeated 
scaling  of  their  domestic  debts,  such  as  Austria  and  Russia  —  have 
been  careful  about  the  payment  of  their  foreign  debts.  Morally  and 
practically  they  have  regarded  such  debts  as  having  precedence 
over  their  domestic  obligations. 

In  a  broad  way,  this  Anglo-French  loan  marks,  we  hope  and 
beheve,  the  entrance  of  the  United  States  into  the  family  of  the 
"lending  nations."  Sooner  or  later  this  country  would  have 
reached  that  position  anyway.  But  the  great  war  has  dried  up  in 
Europe  the  wells  of  capital  available  for  the  development  of  other 
parts  of  the  world.  For  some  time  to  come,  Europe  will  need  all  her 
own  capital  at  home  —  and  probably  considerable  from  this  coun- 
try beside.  She  will  not  be  in  a  position  to  lend  freely  to  the  Argen- 
tine, to  Brazil,  to  Mexico,  and  the  other  food  and  raw  material 
producing  countries.  Probably  she  will  withdraw  gradually  a  large 
part  of  the  huge  investment  she  has  in  the  United  States.  This  is 
our  opportunity.  Not  only  can  we  reduce  gradually  our  large  capi- 
tal indebtedness  to  Europe,  but  we  can  —  if  we  put  our  house  in 
order  —  take  Europe's  place  in  lending  capital  for  the  development 
of  the  rest  of  the  world,  taking  in  exchange  other  people's  securities 
and  extending  with  those  people  the  markets  for  our  own  mer- 
chandise. The  change  will  not  take  place  all  at  once.  This  war,  to 
be  sure,  has  given  us  a  chance  for  a  colossal  stride.  Already  we  have 
repurchased  (October,  191 5)  our  own  securities  held  abroad  or  have 
loaned  to  foreign  nations  to  the  extent  of  between  say  $1,100,000,- 
000  and  $1,300,000,000.  By  so  much  have  we  reduced  our  debt  to 
Europe  and  by  just  so  much  has  Europe  lost  her  creditor  position. 
In  proportion  to  the  reduction  of  the  debt,  in  a  broad  way,  will  be 
the  reduction  in  interest  payments  abroad.  But  it  will  take  some 
time  (unless  the  war  is  unduly  prolonged)  —  perhaps  twenty-five 


UNITED  STATES  AND  FOREIGN  GOVERNMENT  BONDS    9 1 

years  —  to  change  from  being  a  "debtor"  to  a  "creditor"  nation. 
Not  until  then  will  New  York  in  any  permanent  sense  become  the 
financial  center  of  the  world :  for  to  become  the  great  international 
banker  we  must  establish  broad  trade  relations  with  all  the  rest  of 
the  world,  and  we  must  be  in  a  position  to  finance  our  foreign  trade 
by  lending  freely.  We  must  not  be  provincial  or  narrow.  To  lend 
freely  we  must  save.  We  must,  moreover,  estabhsh  an  adequate 
merchant  marine  and  satisfactory  banking  facihties  in  foreign 
countries.  All  these  things  we  must  do  to  seize  to  the  full  the 
present  opportunity  and  to  place  the  credit  of  the  United  States 
indisputably  and  for  a  long  time  to  come  at  the  head  of  the 
list.i 

It  remains  only  to  give  an  idea  of  the  prices  of  some  of  the  leading 
government  bonds  under  the  stress  of  war  on  a  colossal  and  unpre- 
cedented scale.  In  February  and  March,  loi";,  after   „, 

111  •  1  .  ,  War  prices 

the  war  had  been  in  progress  about  six  months,  some  of  government 
of  the  leading  securities  of  the  allied  nations  were 
quoted  approximately  as  follows:  ^ 

British  consols,  2^% (Flat)  ^  68^%  (February  5) 

French  rentes,  3% 68f  (March  12) 

Italian  rentes,  3^% 79i  (February  5) 

Russian,  second  series  4% 75    (February  5) 

Russian,  1906,  5% 95^  (February  5) 

Japanese,  sterling,  1910,  4% 71-j  (February  5) 

Japanese,  sterling,  1905,  second  series, 

4i% SSj%  (February  5) 

The  London  "Economist"  ^  has  given  highest  and  lowest  prices, 
highest  price  in  July,  1914,  and  prices  on  February  16,  191 5,  of 
some  leading  "enemy"  securities  —  including  German  imperial 
3%  bonds,  Prussian  2,2%  consols,  Austrian  4^%  treasury  notes, 

^  For  information  in  regard  to  this  loan,  see  Commercial  and  Financial  Chronicle 
(New  York),  vol.  loi,  p.  1053;  Statist  (London),  vol.  86,  p.  14J  and  Economist  (Lon- 
don), vol.  81,  p.  499. 

2  Statist  (London),  vol.  Lxxxrrr,  pp.  195  and  406.  For  later  prices  of  government 
bonds  of  all  the  nations  at  war,  see  Economist  (London),  July  3, 1915,  vol.  lxxxi,  p.  8. 
The  latest  prices  for  British  consols,  one  issue  of  Japanese  bonds,  and  one  issue  of 
Russian  bonds,  given  in  this  number  of  the  Economist,  are  "minimum"  or  "pegged" 
prices. 

'  Prices  include  accrued  interest. 

*  Economist  (London),  February  20,  1915,  p.  313. 


92        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

and  Hungarian  4%  and  4^%  rentes.  These  prices  are  hardly  worth 
quoting.  The  low  prices  given  represent  prices  which  Englishmen 
or,  at  any  rate,  traders  on  the  London  Stock  Exchange  would  pay 
for  the  government  bonds  of  their  enemies,  and  cannot  be  taken 
as  representing  the  credit  of  the  nations  concerned.  Furthermore, 
interest  on  "  enemy"  securities  is  not  being  paid  to  British  holders.^ 
The  prices  given  in  our  list  of  loans  put  out  during  the  war  give  a 
fairer  idea  of  the  credit  of  the  various  nations.  The  huge  domestic 
loan  of  Great  Britain  —  about  $3,000,000,000  —  has  been  put  out 
in  the  form  of  4I  per  cents  at  par,  which  price  includes  several 
months'  accrued  interest;  and  the  loan  raised  in  the  United  States 
has  been  sold  to  investors  at  96^  to  98  and  interest.  The  French 
national  defense  bonds  have  been  put  out  at  par  ^  for  short-term 
5%  bonds;  Russia  has  put  out  5  per  cents  at  94  and  5-year  5I  per 
cents;  Italy  has  borrowed  with  25-year  4I  per  cents  and  one  year 
convertible  6  per  cents ;  Germany  has  put  out  5  per  cents  at  from 
972  to  99;  Austria  has  put  out  5I  per  cents  at  97I;  and  Hungary 
6  per  cents  at  97^.  The  credit  of  Great  Britain  remains  highest 
of  all  the  nations  at  war,  with  France  next,^  and  Germany  third. 
A  decisive  outcome  of  the  war  one  way  or  the  other  would  have  the 
effect,  of  course,  of  enhancing  the  market  value  of  the  securities  of 
the  victorious  nations  and  of  depressing  the  market  value  of  the 
securities  of  the  defeated  nations.  How  radical  has  been  the  change 
in  the  credit  of  all  the  nations  concerned,  however,  may  be  seen 
by  comparing  the  prices  of  1915  with  those  in  our  table  for  1913.^ 

^  Economist  (London),  July  3,  1915,  vol.  Lxxxi,  p.  8. 

2  Advices  received  from  the  Boston  News  Biireau. 

'  The  issue  price  —  88  —  of  the  5%  perpetual  rentes  brought  out  in  November, 
1915,  would  seem  to  show  the  credit  of  Germany  to  be  higher  than  that  of  France. 
(See  the  Statist,  vol.  lxxxvi,  p.  592.) 

*  The  following  prices  of  leading  government  bonds  before  and  during  the  Franco- 
Prussian  War  may  be  of  interest  {Economist  [London],  September  5,  1914,  p.  416):  — 


British,  3%  consols 
French,  3%  rentes. 
United  States,  6%. 

Russian,  4% 

Italian,  s  % 


Closing 
price 
i86g 


Fluctuations  in  1870 


Highest  Lowest 


94t 
75I 

7oi 
60J 


881 

SI 

78 

60 

43 


Closing 
price 
1870 


Qii 

SO 
89, 

56 


UNITED  STATES  AND  FOREIGN  GO\^RNMENT  BONDS     93 

On  February  11,  1915,  the  United  States  Panama  3  per  cents  were 
quoted  at  ioi|  and  interest,  bid,  or  only  f  of  1%  less  than  the 
price  in  January,  1913.^ 

We  have  traced  the  rise  and  development  of  the  so-called  great 
powers,  whose  government  bonds  are  the  leading  national  securi- 
ties; we  have  considered  the  relation  which  the  debts  Summary  of 
of  these  nations  bore  to  their  resources  before  the  inffntoTh^' 
present  great  war;  we  have  taken  up  briefly  the  debt  ^rices^oT'ov 
history  or  record  of  good  or  bad  faith  of  the  nations  emment  bonds 
issuing  these  obligations;  we  have  discussed  in  a  general  way  the 
financial,  economic,  and  political  status  of  these  nations  as  bearing 
on  their  credit;  and  we  have  tried  to  indicate  as  far  as  possible  at 
this  time  the  effect  of  the  great  war  on  their  condition.  All  discus- 
sions of  government  bonds  involve  in  a  certain  way  every  factor 
relating  to  national  existence.  Fluctuations  in  prices  of  govern- 
ment bonds  represent  in  a  broad  way  fluctuations  in  the  resources, 
debt,  income,  expenditure,  progress,  power,  and  prestige  of  the 
nations  issuing  the  bonds,  as  well  as  fluctuations  in  the  general 
economic  and  financial  conditions  prevailing  throughout  the 
world.  We  must  remember  that  government  bonds,  as  we  said  at 
the  beginning  of  this  chapter,  usually  are  simply  promises  to  pay 
and  promises  not  enforceable  by  any  legal  process.  We  must  try 
to  make  up  our  minds,  from  all  the  data  available,  how  good  in 
each  case  the  promise  is. 

*  Commercial  and  Financial  Chronicle  (New  York),  February  13,  1915,  p.  540. 


CHAPTER  III 

STATE  BONDS 

State  bonds,  like  government  bonds,  usually  are  simply  promises 
to  pay.  At  times  some  of  our  States  have  issued  bonds  to  railroads, 
State  bonds  canals,  or  other  private  corporations  and  have  taken 
Smpiy  pro-  ^^  security  mortgage  bonds  or  stocks  of  the  companies. 
mises  to  pay  There  have  been  cases  also  of  railroad  or  other  cor- 
poration bonds  guaranteed  by  States.  As  a  rule,  however,  sound 
financing  requires  that  state  bonds  shall  be  issued  only  for  strictly 
public  purposes,  and  that  the  interest  shall  be  payable  out  of  taxes 
levied  on  all  the  taxable  property  within  the  State. 

In  view  of  the  fact  that  no  bondholder  —  unless  the  bondholder 
happens  to  be  another  State  —  can  sue  a  State  without  its  consent,^ 
No  legal  remedy  the  character  or  quality  of  the  promise  to  pay  is  of 
defauited'^state  great  importance.  The  case  may  be  stated  even  more 
t»o^ds  strongly  by  saying  that  in  the  last  resort  there  is  no 

legal  remedy  whatever  for  collecting  defaulted  state  bonds.  Even 
if  a  verdict  is  secured  in  the  courts,  the  Legislature  may  refuse  to 
make  any  appropriation  to  pay  interest  ^  or  principal.  This  is  for 
the  reason  that  in  the  matter  of  paying  debts  a  State,  like  a  na- 
tion, is  a  sovereign  power. 

With  allowance  for  the  difference  in  the  character  of  the  unit, 
Other  factors  the  f actors  determining  the  safety  of  state  bonds  are 
the^saiety"^  much  the  Same  as  in  the  case  of  government  bonds, 
of  state  bonds      They  may  be  grouped  about  these  headings:  — 

(i)  The  debt  statement  of  a  State  or  the  proportion  of  net  debt  to 
property  and  to  population. 

(2)  The  debt  history  of  a  State  or  its  record  of  good  or  bad  faith. 

(3)  The  present  constitutional  provisions  governing  the  creation 
and  payment  of  debt. 

^  Constitution  of  the  United  States,  Eleventh  Amendment. 

2  See  108  U.S.  76,  New  Hampshire  vs.  State  of  Louisiana  and  New  York  vs.  State 
of  Louisiana,  and  192  U.S.  286  (1904),  South  Dakota  vs.  North  Carolina.  The  latter 
case  resulted  finally  in  the  settlement  of  a  small  amount  of  defaulted  bonds  by 
North  Carolina.   (See  Commercial  and  Financial  Chronicle,  vol.  80,  p.  1382.) 


STATE  BONDS  95 

(4)  The  amount  and  character  of  the  population. 

(5)  General  considerations  bearing  on  the  present  and  future 
prosperity  of  the  State,  such  as  size  and  location  of  territory, 
natural  resources,  and  water  and  rail  facilities. 

We  will  take  up  first  the  debt  statements  of  the  various  States. 
We  give  on  pages  96  and  97  a  table  for  all  the  States 
of  the  Union,  showing:  (i)  bonds,  special  debt  to   mentsofthe 
trust  funds,  and  floating  debt;   (2)  cash,  securities, 
and  sinking-fund  assets  offsetting  same;   (3)  debts  less  sinking- 
fund  assets;  and  (4)  same  per  capita.^ 

As  may  be  seen  from  the  accompanying  table  (Table  I),  the 
States  of  Vermont,  New  Jersey,  Delaware,  Florida,  Iowa,  North 
Dakota,  South  Dakota,  Nebraska,  Kansas,  Wyoming,  Nevada,  and 
Oregon  have  debts  less  sinking-fund  assets  of  less  than  $1,000,000 
each.  The  State  of  Pennsylvania  has  no  net  debt  at  all,  and  the 
State  of  West  Virginia  has  no  debt  which  it  has  recognized.^  The 
States  having  debts  less  sinking-fund  assets  in  excess  of  $5,000,000 
are  Massachusetts,  Rhode  Island,  Connecticut,  New  York,  Mary- 
land, Ohio,  Virginia,  North  Carolina,  South  Carolina,  Georgia,  Ala- 
bama, Tennessee,  Louisiana,  Michigan,  Oklahoma,  and  CaHfornia. 

As  far  as  per-capita  net  debts  go,  the  States  having  the  smallest 
—  in  addition  to  Pennsylvania  and  West  Virginia  which  have  none 
at  all  —  are:  Oregon,  $.04;  Kansas,  $.14;  Iowa,  $.16; 

f^  T.r  1         1        ^  Til-       -a.  Smallest  and 

New  Jersey,  $.24;  Nebraska,  $.31;  lllmois,  $.39;  and  largest  debts 
Indiana,  $.49.  The  States  having  the  largest  net  debts  "  '^ 
per  capita  are:  Massachusetts,  $22.78;  Arizona,  $13.28;  Virginia, 
$10.46;  New  York,  $9.05;  Rhode  Island,  $9.02;  and  Louisiana, 
$7.89.  In  the  cases  of  both  Massachusetts  and  Arizona,  the  debt 
figures  include  local  debts  for  which  the  States  have  made  them- 
selves responsible. 

These  figures  as  to  the  size  of  the  debts  and  the  net  debts  per 
capita  in  the  various  States,  while  important^  must  The  net  debt 
not  be  taken  as  conclusive  in  the  matter  of  the  rela-   fs^not°con-°°^ 
tive  safety  of  the  various  state  bonds.    There  must   elusive 
be  considered  in  addition  not  only  what  the  States  have  to  show  for 

^  Table  from  Department  of  Commerce,  Bureau  of  the  Census,  Wealth,  Debt,  and 
Taxation,  igij  (Washington,  1915),  vol.  i,  p.  37. 

2  The  State  of  West  Virginia  has  been  held  liable  for  a  portion  of  the  debt  of  the 
old  State  of  Virginia.  This  subject  will  be  discussed  later  in  this  chapter. 


96 


AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 


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98        AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

their  debts/  but  also  the  proportion  between  the  debts  and  the 
value  of  taxable  property. 

Percentage  of  ^^  ^^^  table  on  page  99,  we  give  assessed  valuation, 

net  debt  to         same  per  capita,  debt  less  sinking-fund  assets,  same 

fl.SSCSSCCl  V3.I—  i  X  /  ij  ? 

nation  in  the       per  Capita,  and  per  cent  of  debt  less  sinking-fund  assets 

different  States      ,  jii.--iii.iOi.j_-  o 

to  assessed  valuation  m  all  the  States  m  1912-13/ 
This  table  (Table  II)  shows  that  the  States  of  Massachu- 
setts, Virginia,  North  CaroKna,  South  Carolina,  Alabama,  Missis- 
sippi, Tennessee,  Louisiana,  New  Mexico,  Arizona,  and  Idaho  have 
net  debts  of  1%  or  over  of  their  assessed  valuations.  The  largest 
percentage  of  net  debt  is  that  of  Virginia  with  2.55%  of  its  assessed 
valuation.  States  having  net  debts  of  less  than  one  tenth  of  1%  of 
their  assessed  valuations,  in  addition  to  Pennsylvania  and  West 
Virginia,  are:  New  Jersey,  Ohio,  Indiana,  Wisconsin,  Minnesota, 
Iowa,  Nebraska,  Kansas,  Wyoming,  and  Oregon. 

Like  the  figures  for  the  debts  themselves,  these  figures  showing 
the  proportion  of  net  debts  to  assessed  valuations  are  only  part  of 
Relation  be-  the  story.  In  every  State  the  question  arises  as  to 
andTrufvaiue  what  part  of  the  actual  or  true  value  of  property  the 
of  property  asscsscd  valuation  represents.^  In  New  York  State, 
for  instance,  the  assessed  valuation  for  191 2  represents  only  about 
44.51%  of  the  estimated  true  value  of  property  as  given  by  the 
census,  and  in  Pennsylvania  the  assessed  valuation  represents  only 
about  32.79%  of  the  estimated  true  value.  In  Ohio  the  proportion 
of  assessed  valuation  to  true  value  of  property  is  about  72.75%, 
whereas  in  Illinois  it  is  only  about  15.14%.  In  Massachusetts  the 
proportion  is  76.20%  and  in  California  34.51%.  In  any  given 
State  the  relation  of  the  assessed  value  to  the  true  value  of  the 
property,  as  far  as  can  be  ascertained,  should  be  borne  in  mind  in 
estimating  the  burden  of  debt  on  the  State. 

On  the  whole,  it  may  fairly  be  said  that  the  debts  of  our  States 
are  small.  This  has  not  always  been  true  to  the  same  extent  that  it 

^  For  value  of  public  properties  of  States,  see  Abstract  of  Special  Bulletins, 
Wealth,  Debt  and  Taxation,  igij  (Washington,  1915),  vol.  i,  p.  58.  The  total  value 
of  public  properties  of  all  the  States  in  1913  is  given  as  $695,499,187,  compared 
with  total  debts  less  sinking-fund  assets  of  $345,942,305. 

2  Wealth,  Debt  and  Taxation,  1913  (Washington,  1915),  vol.  i,  pp.  37,  747,  749. 

*  For  estimated  true  value  of  all  property,  1850-1912,  and  same  per  capita  by 
States,  see  Wealth,  Debt,  and  Taxation,  IQJ3,  vol.  i,  pp.  23-26. 


STATE  BONDS 
TABLE  II 


99 


state 


Alabama 

Arizona 

Arkansas 

California  .... 

Colorado 

Connecticut .  .  . 

Delaware 

Florida 

Georgia 

Idaho 

Illinois 

Indiana 

Iowa  

Kansas 

Kentucky 

Louisiana 

Maine 

Maryland  .... 
Massachusetts.  . 

Michigan 

Minnesota  .... 
Mississippi .... 

Missouri 

Montana 

Nebraska 

Nevada  

New  Hampshire 
New  Jersey  ... 
New  Mexico . . . 
New  York  .... 
North  Carolina  . 
North  Dakota  . 

Ohio 

Oklahoma 

Oregon ........ 

Pennsylvania .  .  . 
Rhode  Island .  .  . 
South  Carolina  , 
South  Dakota  .  . 

Tennessee 

Texas 

Utah 

Vennont   

Virginia 

Washington  .  .  .  . 
West  Virginia  .  . 

Wisconsin   

Wyoming 


Assessed 
valuation  * 

Assessed 
valuation 
per  capita 

Debt  less 

sinking  fund 

assets 

Debt  per 
capita 

Percentage 
of  net  debt 
to  assessed 
valuation 

$566,807,488 

$253.00 

$13,132,375 

$5.95 

2.32% 

140,338,191 

608.00 

3,064,818 

13.28 

2.18 

427,473,108 

258.00 

1,236,066 

0.76 

•29 

2,921,277,451 

1,095.00 

10,222,744 

3.83 

•35 

422,330,199 

478.00 

3,173,949 

370 

•75 

1,041,334,019 

881.00 

7,110,451 

6.12 

.68 

93,8r4,oii 

4SI-00 

763.122 

370 

.81 

212,887,518 

258.00 

619,199 

0.77 

•29 

842,358,342 

308.00 

6,934,202 

2.57 

.82 

167,512,157 

442.00 

2,143,314 

5-92 

1.28 

2,343,673,232 

39700 

2,272,620 

0.39 

.10 

1,898,307,218 

688.00 

1,350,30s 

0.49 

.07 

902,092,597 

406.00 

356,670 

0.16 

.04 

2,746,900,291 

1,630.00 

243.121 

0.14 

.008 

1,031,174.033 

441.00 

4,441.867 

1.90 

•43 

550,517,808 

315.00 

13,546,150 

7.89 

2.46 

416,891,264 

550.00 

1,254,998 

1.67 

•30 

1,235.457,607 

929.00 

7,333,913 

5.56 

•59 

4,803,078,625 

1,353.00 

79,551,090 

22.78 

1.66 

2,317,561,634 

789.00 

7,089,092 

2.41 

•31 

1,474.585,315 

676.00 

1,345.290 

0.63 

.09 

411,551,004 

219.00 

4,460,519 

2.41 

1.08 

1,860,087,956 

555.00 

4,671,218 

1.40 

•2S 

346,550.585 

827.00 

1,512,874 

3.73 

•44 

463,371,889 

376.00 

374,394 

0.31 

.08 

101,087,082 

1,067.00 

607,695 

6.70 

.60 

439,683,132 

1,007.00 

1,955.611 

4.50 

•44 

2,490,490,534 

906.00 

642,069 

0.24 

•03 

72,457,454 

196.00 

1,218,209 

3.41 

1.68 

11,131,778,917 

1,146.00 

86,205,247 

9.05 

.77 

747,500,632 

324.00 

8,058,430 

3.54 

1.08 

293,048,119 

443.00 

820,424 

1.29 

•31 

6,481,059,158 

1,305.00 

5,142,042 

I. OS 

.08 

1,193,655,846 

616.00 

6,930,243 

3-74 

•58 

905,011,679 

1,196.00 

30,852 

0.04 

.003 

5,068,802,988 

625.00 

— 

619,010,208 

1,068.00 

5,126,815 

9.02 

.83 

291,531,003 

185.00 

6,190,036 

3.98 

2.12 

354,278,413 

551.00 

370,000 

0.58 

.10 

625,686,792 

280.00 

11,811,640 

532 

1.89 

2,532,710,050 

607.00 

4,656,499 

1. 14 

.18 

200,299,207 

495.00 

1,429,694 

3.62 

•71 

221,530,142 

615.00 

569,906 

1.58 

.26 

864,962,621 

406.00 

22,043,14s 

10.46 

2.5s 

1,005,086,251 

747.00 

1,550,012 

1.21 

•IS 

1,168,012,658 

894.00 

— 



2,466,636,793 

1,019.00 

2,251,000 

0.93 

.09 

180,750,630 

1,107.00 

122,375 

0.77 

.07 

*  Assessed  valuation  of  all  property  subject  to  ad  valorem  taxation.  There  was  in  many  States  a  large 
increase  in  assessed  valuation  in  1913.  Among  these  States  may  be  mentioned  Alabama,  Colorado,  Idaho, 
Kentucky,  and  South  Dakota.  (See  Stale  and  City  Supplement  of  the  Commercial  and  Financial  Chronicle, 
May  29, 1915.) 

is  to-day.    In  1790/  the  National  Government  arranged  to  as- 
sume state  debts  incurred  largely  for  the  Revolution-   changes  in 
ary  War,  and  did  actually  assume  $18,271,786.47   stSdlbts 
of  these  debts.    Between  1790  and  1820,  the  States   1790-1913 

^  Act  approved  August  4,  1790,  ist  Cong.,  2d  Sess.  (i  Stat.  L.  chap,  xxxiv, 
P-  139) 


lOO      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

incurred  only  a  small  amount  of  debt.  From  1820  to  1830,  they 
issued  bonds  amounting  to  $26,470,417,  and  from  1830  to  1838, 
$147,836,577.^  The  Civil  War  brought  a  large  increase  in  the  debts 
of  many  of  our  States.^  For  the  years  from  1870  to  1913  inclusive, 
the  table  ^  on  page  loi  shows  the  total  debts,  net  debts,  and  net 
debts  per  capita  of  all  the  States. 

As  may  be  seen  from  the  table,  the  total  debt  less  sinking- 
fund  assets  of  all  our  States  in  1913  actually  was  less  than  in  1870. 
The  lowest  point  was  reached  in  1895,  after  which  there  was  a  grad- 
ual increase  until  1913,  when  an  unusual  increase  took  place.  This 
was  due  probably  to  the  exceptional  demand  for  securities  of  the 
class  of  state  bonds  and  to  the  tendency  of  certain  States  in  recent 
years  to  issue  large  amounts  of  bonds  for  roads,  canals,  and  other 
improvements.  Owing  to  the  rapid  increase  in  population,  the 
per  capita  increase  has  not  always  followed  closely  the  absolute 
increase.  The  lowest  net  debt  per  capita  for  the  period  covered  by 
the  table  was  reached  in  1909  and  the  highest  in  many  years  in 
1913.  On  the  whole,  as  stated  above,  the  aggregate  debt  of  our 
States  may  be  spoken  of  as  moderate. 

This  comparative  freedom  of  our  States  from  debt  has  been  the 
result,  in  most  cases,  of  long  and  sometimes  bitter  experience.  At 
Comparative       some  time  in  their  history,  twenty  of  our  States,  in- 

freedom  from       eluding  somc  of  our  bcst  Northcm  States,  have  de- 
debt  due  to  °  .  .  . 
bitter  ex-            faulted  the  mterest  on  their  bonds  or  compromised 

or  repudiated  the  principal. 

When  we  remember  that  it  is  impossible  in  the  present  condition 
Importance  of  of  the  law  to  forcc  a  State  to  pay  its  bonds,  the  record 
debt  history  ^^  ^^^  different  States  in  the  payment  of  their  obhga- 
tions  becomes  of  commanding  importance. 

There  were  three  periods  of  default,  compromise,  or  repudiation: 
(i)  From  1840-42,  when  Pennsylvania,  Maryland,  Indiana,  lUi- 
Three  periods  nois,  and  Michigan,  as  well  as  Florida,  Mississippi, 
compromLor  ^"^^  Arkansas  defaulted;  (2)  from  1848-60,  when 
repudiation  Minnesota,  Texas,  and  California  began  certain  ad- 
justments of  their  debts;  and  (3)  from  the  beginning  of  the  Civil 
War  down  to  the  early  nineties,  when  Virginia,  North  Carolina, 

1  Tenth  Census,  vol.  vii,  p.  523.  '  Ihid.,  pp.  530,  537,  554. 

'  National  and  State  Indebtedness,  iS^o-igij,  p.  18. 


STATE  BONDS 


lOI 


South  Carolina,  Georgia,  Florida,  Alabama,  Tennessee,  Louisiana, 
Arkansas,  and  Missouri  defaulted  on  or  compromised  their  bonds. 
In  this  period  also  arose  the  difficulties  between  Virginia  and  West 
Virginia. 


TOTAL  AND  NET  DEBT  AND  NET  DEBT  PER   CAPITA  OF 
ALL  THE   STATES,  1870-1913 


Year 


1870 

1880 

1891 
1892 

1893 
1894 

1895 

1896 
1897 
1898 
1899 
1900 

1901 
1902 
1903 
1904 
1905 

1906 
1907 
1908 
1909 

1910 
1911 
1912 
1913 


Total  Debt 


$352,866,698 

306,016,561 

258,195,056 
249,266,723 
240.175,835 
233,146,225 
225,488,146 

226,702,714 
237.043.590 
253.957.941 
261,118,967 
265,133,041 

262,247,074 
274.148,756 
266,926,910 
272,493,578 
>  278,135,397 

281,411,192 

279.768,751 
290,029,635 
300,494,024 

322,948,868 
347,041,981 
376,114,098 
422,796,525 


Sinking- Fund 
Assets 


531,270,789 

46,984,569 

43.518,777 
38.124,440 

37.429,077 
31,271,660 

28.123.908 
28,358,779 
30.049,746 
32,602,117 
29,821,060 

33,856.273 
34,859,467 
34,791.189 
36,846,091 
39,264,804 

42,952,929 
44,501,415 
50,655,306 
59,355.095 

66,813,710 
71.177,988 
76,451,848 
76,980,571 


Debt  less  Sinking- 
fund  Assets 


A  mount 


Per 
Capita 


$352,866,698 
274.745.772 

211,210,487 
205,747,946 
202,051,395 
196.194,298  ^ 
194,216,486 

198,578.806 
208,684,811 
223,908,195 
228,571,048  ^ 
235.453.594  * 

228,478,997  5 

239,369,271  6 
232,135,721 
235.647,487 
238.870,593 

238,458,263 
235.267.336 
239.374,329 
241.138,929 

256,143.276  7 
275,919.983  8 
299,763.423  9 
345,942,305  1' 


59.  IS 

5-48 

3-37 
3  14 
3  03 
2.88 
2.80 


2.81 
2.90 
3.06 
3  07 
3  10 

2-95 
3  03 
2.88 
2.86 
2.8s 

2.79 
2.70 
2.70 
2.67 

2.78 
2-95 
3  15 
357 


1  Not  reported.       '  Sinking  fund  exceeds  debt  $477,150  —  Rhode  Island. 
'  Sinking  fund  exceeds  debt  $54,198  —  New  Jersey. 
*  Sinking  fund  exceeds  debt  $141,613  —  New  Jersey. 
6  Sinking  fund  e.xceeds  debt  $88,196  —  New  Jersey. 
6  Sinking  fund  exceeds  debt  $79,982  —  New  Jersey. 
'  Sinking  fund  exceeds  debt  $8,118  —  Pennsylvania. 
8  Sinking  fund  exceeds  debt  $55,990  —  Pennsylvania. 
»  Sinking  fund  exceeds  debt  $101,173  —  Pennsylvania. 
10  Sinking  fund  exceeds  debt  $126,351  —  Pennsylvania. 


102      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

The  earliest  period  of  default  followed  the  financial  crisis  of 

1837-39.    -^^  the  beginning  of  1830,  the  debts  of  the  States  were 

only  about  $13,000,000.    In  1834,  the  last  installment 

First  period  .     ,       ^^    .       ,   ^  .   ,  .  ,  i  •   i 

of  the  United  States  debt  was  paid  —  an  act  which 
firmly  established  our  credit  abroad.  In  view  of  the  fact  that  the 
States  did  a  large  part  of  their  borrowing  in  London,  the  impor- 
tance of  this  becomes  apparent.  Provision  was  made  in  1836  for 
distribution  of  the  surplus  revenues  of  the  United  States  among  the 
several  States.^  Furthermore,  the  period  was  a  prosperous  one  all 
over  the  world.  There  had  been  in  our  country  a  real  and  substan- 
tial growth,  although  the  population  and  resources  of  the  Western 
States  were  small.  These  favorable  factors  were  magnified  by  other 
influences  of  a  more  doubtful  character.  The  fight  between  the 
United  States  Government  and  the  United  States  Bank  caused  the 
chartering  of  large  numbers  of  state  banks  all  over  the  country. 
Paper  money  became  abundant,  and  a  spirit  of  speculation  per- 
meated the  whole  country.  "Men  acted  as  if  a  short  and  secure 
road  to  wealth  had  been  discovered,  on  which  all  might  travel,  and 
he  who  went  the  fastest  would  be  the  first  to  reach  the  desired 
end."  ^  The  States  borrowed  money  generously  and  spent  it  lav- 
ishly. Internal  improvements  were  undertaken  on  a  huge  scale. 
Rashness  became  "epidemic."  Before  the  crash  came,  high  prices 
for  practically  everything  prevailed.  Then,  more  or  less  suddenly, 
the  Bank  of  England  stopped  the  credit  of  several  American  bank- 
ing houses  in  London.  Suspension  of  specie  payments  soon  fol- 
lowed, then  a  short  renewal,  and  then  a  second  suspension.  Not 
only  the  Bank  of  the  United  States  in  Pennsylvania,  but  every 
bank  south  of  Philadelphia,  stopped  payment.  By  1840  many  of 
our  States  were  in  financial  difficulties.^ 

In  the  following  pages  we  shall  attempt  to  give  a  short  debt  his- 
Compiete  short  tory  of  all  the  defaulting  States.  So  far  as  we  know, 
defauking'^  °^  this  is  the  only  collected  history,  written  from  sources 
States  an(j  brought  up  to  date,  which  includes  all  the  States 

^  Tenth  Census,  vol.  vii,  p.  529. 

2  North  American  Review,  January,  1844,  p.  114. 

*  Ibid.,  pp.  110-22.  See  also  Bankers^  Magazine  and  Statistical  Register,  Novem- 
ber, 1849,  PP-  34i~43-  For  3-  short  discussion  of  the  origin  and^developmcnt  of  the 
internal  improvement  idea,  see  Dewey,  Financial  History  oj  the  United  States  (New 
York,  1915),  pp.  212-16. 


STATE  BONDS  I03 

at  one  time  or  another  defaulting  on  their  bonds.  In  view  of  the  fact 
that  the  experiences  of  many  of  these  States  have  been  more  or 
less  similar,  some  readers  may  prefer  to  follow  the  histories  only  of 
such  States  as  interest  them.  The  very  similarity,  however,  of  so 
many  of  the  debt  histories  makes  all  the  clearer  the  lessons  to  be 
learned.  Not  only  the  reasons  for  default  are  established,  but  the 
way  in  which  the  bondholders  fared  in  final  settlement. 

August  I,  1842,  Pennsylvania  defaulted  interest  on  its  bonds. ^ 
In  1 8  2  !^ ,  the  S  tate  had  entered  upon  an  important  sys-    ^       ,     . 

r  .  1  .  XT     1        1      .  1         /•    Pennsylvania 

tem  of  internal  unprovements.  under  the  mipulse  01 
an  act  2  passed  in  1836  to  charter  the  United  States  Bank, — 
which  act  also  repealed  the  state  tax  on  real  and  personal  property, 
—  a  new  series  of  improvements  was  begun.  Bonds  were  issued, 
largely  in  aid  of  railroads  and  canals,  until  in  1842  the  state  debt 
had  reached  $37,319,395.  After  the  panic  of  1837,  work  on  the 
state  improvements  ceased,  and  many  of  the  properties  passed  into 
private  hands.  For  a  large  part  of  its  debt,  the  State  obtained 
nothing  whatever.  Furthermore,  it  was  obliged  to  receive  in  pay- 
ment of  revenues  its  own  " relief  notes"  or  depreciated  currency. 
Under  this  combination  of  unfavorable  circumstances,  the  State 
was  unable  to  pay  interest  in  cash. 

It  issued  for  interest,  however,  6%  certificates  or  scrip.'  At  one 
time  something  over  $3,000,000  of  principal  was  overdue.  Im- 
proved methods  of  assessment  and  a  revision  of  the  tax  laws  en- 
abled the  State  to  resume  interest  payments  in  February,  1845. 
At  first,  these  payments  were  made  to  a  considerable  extent  in 
"relief  notes."  In  1848,  only  a  small  amount  of  these  notes  re- 
mained outstanding."^  In  1857  and  1858,  provision  was  made  for 
retirement  of  a  considerable  portion  of  the  principal  of  the  debt 
through  sale  of  railroad  and  canal  propert}^^ 

In  January,  1842,  Maryland  failed  to  pay  interest  on  its  debt. 
Like  Pennsylvania,  Maryland  had  breathed  in  the 
spirit  of  unbounded  optimism  which  prevailed  in 
the  ten  or  a  dozen  years  preceding  1837.  It  had  subscribed  to  the 

^  Norlh  American  Review,  January,  1844,  p.  122. 

2  Laws  of  Pennsylvania  (1835-36),  no.  22. 

^  See  Laws  of  Pennsylvania  (1842),  no.  127. 

*  For  above  account,  see  Hunt's  Merchants'  Magazine,  March,  1849,  PP-  257-68. 

5  See  Tenth  Census,  vol.  vii,  p.  544. 


104      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

stocks  of  various  railroads,  including  the  Baltimore  and  Ohio,  and 
had  loaned  money  to  and  purchased  the  stock  of  the  Chesapeake 
and  Ohio  Canal.  At  the  time  when  the  State  was  using  thus  its 
credit,  it  had  no  system  of  taxation  whatever.  It  depended  solely 
on  the  income  of  the  public  works,  or  else  on  the  sale  of  additional 
bonds,  to  meet  the  interest  on  its  debt.  The  general  insolvency 
following  the  panic  of  1837  caused  a  suspension  of  the  canal  works 
for  some  years.  The  income  from  all  the  improvements  was  far  less 
than  the  amount  necessary  to  pay  interest  on  the  state  debt,  and 
the  State  was  unable  to  negotiate  further  bonds  abroad. 

To  meet  this  situation,  laws  were  passed  in  184 1  and  1842  ^  pro- 
viding for  a  direct  tax.  The  lack  of  a  proper  system  for  collecting 
the  taxes,  however,  together  with  the  difficulty  of  the  times,  made 
this  measure  ineffective.  When  the  State  found  itself  unable  to  pay 
interest,  it  received  coupons  in  payment  of  taxes.  From  1844  to 
1846,  it  made  partial  payments  on  interest  current  and  accrued. 
Later,  it  funded  arrears  of  interest  with  6%  bonds.  On  January  i, 
1848,  it  resumed  current  interest  on  its  public  debt  in  full.  Al- 
though at  one  time  some  people  in  the  State  had  shown  a  leaning 
toward  repudiation,^  the  record  of  Maryland  as  it  was  written  was 
such  as  to  inspire  confidence  in  its  good  faith.^ 

Indiana  suspended  interest  payments  after  January,  1840.  In 
keeping  with  the  spirit  and  practice  of  the  times,  the  State  had 
issued  bonds  in  aid  of  the  Wabash  and  Erie  Canal,  the 
State  Bank  of  Indiana,  and  other  private  enterprises. 
The  negotiation  of  the  bonds  had  been  a  source  of "  fearful  jobbing  " 
and  had  resulted  in  serious  losses  to  the  State.  When  in  1839  it 
became  impossible  to  borrow  more  money,  the  public  works  were 
suspended  and  many  of  them  were  surrendered  or  abandoned.  It 
was  impossible  to  collect  from  the  small  farmers,  who  made  up  most 
of  the  population  at  this  time,  sufficient  taxes  to  meet  the  interest 
on  the  heavy  debt.  At  the  time  of  default  there  was  also  a  consider- 

^  Laws  of  Maryland,  vol.  20  (1841),  chap.  23;  ibid.,  vol.  xxi  (1842),  chap.  116; 
ibid.,  chap.  328. 

2  For  above  account,  see  North  American  Review,  January,  1844,  pp.  125-27,  and 
Hunt's  Merchants'  Magazine,  May,  1849,  pp.  483-89. 

3  In  1837,  when  banks  had  suspended  specie  payments,  Maryland  paid  its  inter- 
est in  gold  or  silver  or  its  equivalent.  (Hunt's  Merchants'  Magazine,  May,  1849, 
p.  487.) 


STATE  BONDS  I05 

able  amount  of  State  paper  outstanding  receivable  for  taxes.  The 
tender  of  this  prevented,  of  course,  the  receipt  of  money  available 
for  interest. 

To  settle  the  interest,  state  bonds  bearing  7%  interest  and  re- 
deemable in  five  years  were  offered,  but  of  these  only  a  trifling 
amount  were  accepted.  The  principal  and  back  interest  of  the  debt 
finally  were  settled  by  an  act  passed  January  19,  1846,  and 
amended  January  27, 1847.^  These  acts  provided  that  one  half  the 
old  debt  and  interest  should  be  taken  care  of  with  new  bonds  pay- 
able from  taxation  and  the  other  half  with  certificates  payable  from 
the  property  and  tolls  of  the  Wabash  and  Erie  Canal. ^  Cash  inter- 
est payments  on  state  bonds  were  resumed  at  the  rate  of  4%  July 

I,  1847.' 

July,  1841,  Illinois  stopped  payment  of  interest  on  its  debt.  An 
act^  for  an  immense  system  of  internal  improvements  had  been 
passed  in  1837.  Bonds  had  been  issued  for  railroads, 
bank-stocks,  and  the  Illinois  and  Michigan  Canal. 
When  "the  great  revulsion  overtook  the  commercial  world,"  all 
work  on  the  public  improvements  stopped.  Many  banks  which 
had  bought  state  bonds  failed,  "and  the  State  never  got  any- 
thing." Banks  to  whose  capital  the  State  had  subscribed  finally 
were  wound  up  "with  total  loss  of  capital."  The  State  was 
obliged,  moreover,  to  receive  its  own  depreciated  paper  for  public 
dues.  In  1844,  the  total  debt,  including  interest,  was  given  by 
the  Governor  as  $1 4,440,38 1.^  Like  Indiana,  Illinois  at  this  time 
simply  was  unable  to  pay.^ 

Within  a  few  years,  however,  the  Illinois  and  Michigan  Canal 
was  completed,  interest  on  that  part  of  the  state  debt  was  paid  to 
date,  and  the  process  of  discharging  the  principal  was  begun.^  To 

^  General  Laws  of  Indiana  (1845-46),  chap,  i;  ibid.  (1847),  chap.  i. 

*  The  canal  was  completed  and  for  a  time  paid  promptly  interest  on  the  certi- 
ficates. Later,  however,  it  proved  a  failure.  (See  Tenth  Census,  vol.  vii,  pp.  621-22, 
and  Commercial  and  Financial  Chronicle,  vol.  19,  p.  493.) 

*  For  above  account,  see  Hunt's  Merchants'  Magazine,  August,  1849,  pp.  150-60. 

*  Public  Laws  of  Illinois  (1836-37),  pp.  121-52  Supplemental  Act.  Ibid.,  pp. 
152-53-    (Both  approved  March  4,  1837.) 

*  Hunt's  Merchants'  Magazine,  December,  1852,  pp.  661-64;  ibid.,  March,  1858, 
p.  278. 

^  North  American  Review,  January,  1844,  p.  127. 
^  Hunt's  Merchants'  Magazine,  March,  1858,  p.  279. 


I06      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

take  care  of  the  state  debt  other  than  the  canal  debt,  annual  taxes 
were  provided.^  January  i,  1857,  the  Governor  of  the  State  de- 
clared that  during  the  past  four  years  $4,564,800.40  had  been  paid 
in  liquidation  of  the  public  debt  as  well  as  interest  on  the  principal 
during  that  time.  "There  is  now  no  doubt  about  the  State  being 
prepared  to  pay  the  interest  upon  her  whole  debt  as  it  matures  in 
future.^  The  record  of  Illinois  is  one  of  delayed  payments,  but  of 
payments  in  full. 

Michigan  defaulted  in  its  interest  payments  July  i,  1841.^  The 
.    .  Constitution  of  the  State  adopted  at  the  time  of  the 

admission  of  the  State  to  the  Union  urged  the  con- 
struction of  a  system  of  internal  improvements.^  In  1837,  the 
Legislature  projected  a  system  of  improvements,  including  rail- 
roads, canals,  and  river  improvements,  exceeding  both  the  means 
and  the  needs  of  the  people.  A  loan  of  $5 ,000,000  was  authorized 
for  these  objects.^  The  State  was  to  sell  its  bonds  through  an 
"agent"  —  the  Morris  Canal  and  Banking  Company  of  New  York 
—  and  to  receive  payment  in  installments.  Under  this  arrange- 
ment, the  State  marketed  $1,362,000  of  its  bonds  at  par  less  a 
commission  of  2^%.  The  agent  was  unable  to  settle  for  the  re- 
maining $3,638,000  bonds.  These  bonds,  with  $200,000  railroad- 
aid  bonds,  were  then  sold  to  the  United  States  Bank  at  Philadelphia 
and  the  Morris  Canal  and  Banking  Company  on  time.  Both 
concerns  failed  and  the  State  received  only  $998,000.  The  State 
was  unable  to  meet  its  interest,  and  work  on  the  public  im- 
provements was  stopped. 

In  settlement,  Michigan  agreed  to  acknowledge  as  much  of  its 
debt  as  it  had  received  payment  for  in  full.  For  interest  on  this 
from  July  i,  1841,  to  July  i,  1845,  it  issued  new  6%  bonds.^  Bonds 
for  which  the  State  had  received  no  payment  were  to  be  canceled. 

^  Const.  III.  (1848),  art.  XV.  This  part  of  the  debt  had  been  funded  to  a  large  extent 
under  an  act  passed  in  1847.   (See  Public  Laws  of  Illinois  [1846-47],  pp.  161-65.) 

2  Hunt's  Merchants'  Magazine,  May,  1857,  p.  545. 

'  North  American  Review,  January,  1844,  p.  134. 

*  Constitution  of  Michigan  (1835),  art.  xii,  sec.  3. 

^  Hunt's  Merchants'  Magazine,  February,  1850,  pp.  133-34.  Act  approved 
March  21,  1837,  as  amended  by  act  approved  November  15,  1837.  {Laws  of  Michi- 
gan [1837],  no.  77;  ibid.  [1837-38],  no.  i.) 

^  Hunt's  Merchants'  Magazine,  February,  1850,  pp.  136-37.  Act  approved  March 
8,  1843.  {Laws  of  Michigan  [1843],  no-  73-) 


STATE  BONDS  I07 

In  settlement  of  bonds  for  which  the  State  had  received  only  partial 
payments,  it  arranged  to  issue  new  bonds  for  the  amount  received 
by  the  State,  together  with  interest,  but  less  damages  for  non- 
payment.^ The  amount  actually  received  on  part-paid  bonds  was 
ascertained  to  be  $3021^0  per  $1000.  Later,  the  State  sold  certain 
railroads  and  accepted  payment  in  state  bonds  on  the  basis  of  the 
above  settlement.^  The  weak  point  in  Michigan's  record  arises 
from  the  fact  that  part-paid  bonds  had  been  pledged  by  the 
United  States  Bank  in  Pennsylvania  to  secure  loans  from  various 
banking  houses  in  Europe,  and  appeared  to  be  in  the  hands  of 
innocent  purchasers.^ 

After  January  i,  1840,  the  then  Territory  of  Florida  paid  no 
interest  on  an  issue  of  bonds  of  the  Bank  of  Pensacola  endorsed 
by  the  Territory.  In  addition  to  this  endorsement, 
Florida  had  issued  bonds  to  supply  the  capital  of  the 
Union  Bank  of  Florida,  and  later,  bonds  in  behalf  of  the  Southern 
Life  Insurance  and  Trust  Company.^  In  1837,  the  banks  suspended 
specie  payments  and  soon  after  were  found  to  be  hopelessly  insol- 
vent. The  population  of  Florida  in  1840  was  only  about  50,000,  and 
the  liabilities  of  the  Territory  fairly  heavy.  ^  The  bonds  referred  to 
the  Territorial  Legislature  later  repudiated.  ^  The  Constitution  of 
the  State,  adopted  before  the  admission  of  Florida  to  the  Union, 
denied  to  the  Legislature  the  power  of  laying  any  tax  for  the 
purpose  of  paying  the  bonds  which  were  issued  by  the  Terri- 
tory.^ 

Again,  in  1873,  the  Legislature  refused  to  make  provision  for 
certain  state  bonds  in  default  —  notably  $4,000,000  bonds  issued 
to  the  Jacksonville,  Pensacola,  and  Mobile  Railroad  Company.^ 
At  this  time  Florida  had  a  funded  and  floating  debt  of  nearly 
twenty  per  cent  of  its  total  assessed  valuation.  The  taxes  collected 

1  See  Laws  of  Michigan  (1842),  no.  60,  and  ibid.,  p.  172  (Joint  Resolution  no.  38). 

2  Hunt's  Merchants'  Magazine,  February,  1850,  pp.  138-39.  See  Laws  of  Michi- 
gan (1842),  no.  60. 

^  North  American  Review,  January,  1844,  pp.  136-37. 
*  Bankers'  Magazine,  December,  1857,  pp.  449-50. 
^  Tenth  Census,  vol.  vii,  p.  587. 
®  Bankers'  Magazine,  December,  1857,  p.  450. 

^  Constitution  of  Florida  (1838;  effective  March  3,  1845),  art.  viii,  sec.  2. 
8  Commercial  and  Financial  Chronicle,  vol.  16,  p.  387.    Tenth  Census,  vol.  Vll, 
pp.  588-89.  Part  of  these  bonds  were  for  the  benefit  of  the  Florida  Central  Railroad. 


Io8      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

had  proved  insufficient  for  the  requirements  of  the  State.^  Further- 
more, a  good  deal  of  railroad  property  had  been  destroyed  during 
the  Civil  War.2 

Yet  the  method  of  escape  chosen  and  the  excuse  given  were  char- 
acteristic. The  Attorney-General  of  the  State  declared  that  there 
was  no  provision  by  law  for  assessing  a  tax  to  pay  either  principal 
or  interest  on  state  bonds  issued  to  the  Jacksonville,  Pensacola,  and 
Mobile  Railroad.  He  alleged  fraud  and  illegality,  and  declared  that 
the  Legislature  never  would  authorize  a  tax  to  pay  the  bonds.^ 
The  Supreme  Court  of  Florida  sustained  the  Attorney-General  and 
the  Legislature  in  the  repudiation.^  In  191 2,  the  Council  of  the 
Corporation  of  Foreign  Bondholders,  London,  listed  $7,000,000  old 
bonds  of  Florida  in  default.^ 

After  July  i,  1840,  Mississippi  paid  no  interest  on  $2,000,000 

bonds  put  out  to  subscribe  to  the  stock  of  the  Planters'  Bank,^  and 

in  1842,  repudiated,  on  the  ground  of  illegality  and 

^Mississippi 

alleged  fraud,  a  $5,000,000  issue  put  out  to  promote 
the  Union  Bank.^  Both  the  Planters'  Bank  and  the  Union  Bank 
failed.^  It  was  for  this  reason  rather  than  from  inability  to  pay  that 
Mississippi  refused  to  recognize  its  bonds.  The  resources  of  the 
State  were  ample.^  Furthermore,  in  the  case  of  the  Union  Bank 
bonds,  the  Legislature  of  1839  had  resolved  "that  the  sale  of  the 
bonds  was  highly  advantageous  to  the  State  and  the  bank."  ^° 
There  were  no  substantial  grounds  of  illegality  in  either  case.  The 
State  Court  of  Errors  and  Appeals  had  held  the  Union  Bank  bonds 

1  Commercial  and  Financial  Chronicle,  vol.  16,  p.  187,  and  vol.  17,  p.  19. 

2  International  Review,  November,  1880,  p.  579. 

*  Commercial  and  Financial  Chronicle,  vol.  17,  p.  323. 

*  Holland  v.  The  State  of  Florida  et  ah,  15  Florida,  455  (1876). 

^  Thirty-ninth  Annual  Report,  Council  of  the  Corporation  of  Foreign  Bondholders, 

P-365- 

*  Bankers^  Magazine,  January,  1853,  p.  497,  and  November,  1849,  P-  342. 
December  2,  1852,  the  people  voted  against  paying  these  bonds.  (Batikers'  Mag- 
azine, January,  1853,  p.  499.) 

^  North  Atnerican  Review,  January,  1844,  p.  132.  Thirty-eighth  Annual  Report, 
Council  of  the  Corporation  of  Foreign  Bondholders,  p.  388. 

8  Bankers'  Magazine,  December,  1846,  p.  339.  Thirty-eighth  Annual  Report, 
Council  of  the  Corporation  of  Foreign  Bondholders,  pp.  39-40.  North  American 
Review,  January,  1844,  p.  130. 

'  Bankers'  Magazine,  December,  1850,  pp.  454-56,  and  ibid.,  November,  1849, 

p.  349- 
10  North  American  Review,  January,  1844,  p.  132. 


STATE  BONDS  I09 

valid  obligations  of  the  State,  and  the  legality  of  the  Planters' 
Bank  bonds  was  not  seriously  questioned.^ 

The  Constitution  of  Mississippi,  as  amended  in  1876,  prohibited 
the  State  from  ever  paying  the  Union  Bank  bonds  or  the  Planters' 
Bank  bonds.^  Judge  Curtis  long  ago  wrote  laconically  that,  in  the 
payment  of  debts,  there  was  a  great  difference  between  "  the  people 
of  Mississippi  and  the  people  of  Massachusetts."  ^  Mississippi  can 
claim  the  honor  of  inventing  the  word  "repudiation"  in  the  sense 
in  which  it  is  now  used.^ 

Arkansas  was  in  default  in  1841.^  The  State  had  issued  bonds 
in  aid  of  the  State  Bank  of  Arkansas  and  the  Real  Estate  Bank 
of  Arkansas.^  Later,  the  banks  were  placed  in  Hqui-  .  , 
dation  by  an  act  of  the  Legislature.^  For  many 
years,  no  interest  was  paid  on  the  public  debt.  This  was  not  due 
to  lack  of  resources  nor  was  it  owing  to  any  well-grounded  claims 
of  fraud.  In  1845,  the  unpaid  interest  on  the  state  debt  amounted 
at  least  to  as  much  as  the  principal.  A  moderate  tax  would  have 
sufficed  to  take  care  of  the  accruing  interest,  yet  such  a  tax  the 
Legislature  refused  to  levy.^ 

In  1869,  an  act^  was  passed  for  funding  a  portion  of  the  state 
debt  with  new  6%  bonds.  By  the  close  of  1870,  Arkansas  again 
had  increased  its  debt  by  issuing  bonds  for  building  levees  and 
over  $5,000,000  bonds  in  aid  of  railroads.^"  Some  of  the  levee  bonds 
issued  to  contractors  were  sold  by  them  as  low  as  twenty-six  to 
twenty-seven  cents  on  the  dollar. ^^  In  1873,  all  the  aided  railroads 
defaulted  in  interest,  and  the  State  did  likewise.  ^^  On  January  i, 
1878,  the  total  debt  of  Arkansas  had  reached  a  figure  of  nearly 
twenty  per  cent  of  the  assessed  valuation  of  the  State. ^^ 

1  Bankers'  Magazine,  November,  1853,  p.  432.  Thirty-eighth  Annual  Report, 
Council  of  the  Corporation  of  Foreign  Bondholders,  pp.  386  and  388. 

'  Constitution  of  Mississippi,  art.  xii,  sec.  5,  as  amended  January  18,  1876.  See 
Constitution  of  i8go,  art.  xiv,  sec.  258. 

*  North  American  Review,  January,  1844,  p.  133, 

*  See  Bankers'  Magazine,  December,  1846,  p.  339. 

*  Bankers'  Magazine,  December,  1854,  p.  488. 

®  Hunt's  Merchants'  Magazine,  May,  1857,  p.  542. 

'  Tenth  Census,  vol.  7,  p.  603.  ^  Bankers'  Magazine,  December,  1854,  p.  488. 

^  Acts  of  Arkansas  (1868-69),  no.  55. 

^°  Commercial  a>ui  Financial  Chronicle,  vol.  27,  p.  15,  and  vol.  36,  p.  706. 

"  Ihid.,  vol.  14,  p.  85.  12  iijid_^  vol.  36,  p.  706,  and  vol.  40,  p.  119. 

^*  Commercial  and  Financial  Chronicle,  vol.  25,  p.  161. 


no      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

In  the  same  year,  the  Supreme  Court  of  the  State,  on  technical 
grounds,  held  the  levee  bonds  unconstitutional  and  void.^  The 
state  legislature  repudiated  all  the  railroad  bonds  because  "au- 
thorized by  alien  adventurers"^  —  the  so-called  "carpet-bag- 
gers" from  the  North.  This  action  was  confirmed  by  the  Supreme 
Court  of  the  State.^  Against  certain  bonds  included  in  the  funding 
of  1869,  and  known  as  "Holford"  bonds,  the  people  of  Arkansas 
later  charged  fraud. ^  In  1885,  an  amendment  to  the  Constitution 
of  the  State  prohibited  levying  a  tax  or  making  an  appropriation 
to  pay  interest  or  principal  of  the  Holford  bonds,  the  railroad-aid 
bonds,  and  certain  of  the  levee  bonds.^  In  March,  1887,  the  Legis- 
lature passed  an  act  ^  providing  for  the  "undisputed"  debt,  in- 
terest on  which  had  been  in  default  since  1872.  Under  an  act 
passed  in  1899,  provision  was  made  for  refunding  the  recognized 
debt  with  an  issue  of  3%  thirty-year  bonds.^  The  principal  of 
the  debt  of  Arkansas  unprovided  for  in  191 2  has  been  given  as 
$8,706,773.8 

The  second  period  during  which  there  broke  out  difficulties  with 
state  bonds  —  between  1848  and  i860  —  was  of  minor  impor- 
Second  period  tancc.  The  troublcs  of  Texas  began  before  it  was 
compromise  annexed  to  the  United  States,  and  the  difficulties  of 
or  repudiation  California  proved  to  be  largely  a  question  of  legahty 
and  not  of  inability  or  unwillingness  to  pay.  The  case  of  Minne- 
sota was  the  only  one  resembling  many  of  the  earHer  and  many 
of  the  later  defaults. 

An  amendment  ^  to  the  constitution  of  Minnesota  adopted  No- 
vember 6,  i860,  provided  that  no  law  for  the  pa3''ment  of  prin- 

^  Smithee  v.  Garth,  33  Ark.  17. 

2  Commercial  and  Financial  Chronicle,  vol.  31,  p.  303. 

3  State  of  Arkansas  v.  Little  Rock,  Mississippi  River,  and  Texas  Railway  Com- 
pany, 31  Ark.  701. 

*  Commercial  and  Financial  Chronicle,  vol.  2,3,  P-  328.  For  history  of  "Holfords," 
see  Tenth  Census,  vol.  7,  p.  603. 

^  Constitution  of  Arkansas  (1874),  Amendment  no.  i,  adopted  January  14,  1885. 

*  Acts  of  Arkansas  (1887),  p.  269,  Act  CXLVI.  Commercial  and  Financial  Chronicle, 
vol.  44,  p.  421,  and  vol.  40,  p.  119. 

^  Acts  of  Arkansas  (1899),  p.  269,  Act  CXLvni. 

'  Thirty-Ninth  Annual  Report,  Council  of  the  Corporation  of  Foreign  Bondholders, 

P-  365- 

8  Constitution  of  Minnesota  (i860),  art.  ix,  sec.  2,  as  amended  November  6,  i860. 
See  General  Statutes  of  Minnesota  (1866),  p.  37. 


STATE  BONDS  III 

cipal  or  interest  ]of  $2,275,000  state  bonds  issued  in  aid  of  rail- 
roads should  take  effect  until  ratified  by  popular  vote. 

1  •  1    1      1  r  Minnesota 

The  railroads,  which  had  turned  over  first-mortgage 
bonds  to  the  State,  had  become  insolvent.  When  partially  com- 
pleted, they  had  found  themselves  unable  either  to  negotiate  their 
own  securities  except  at  "ruinous  rates"  or  to  sell  any  considerable 
amount  of  state  bonds  issued  for  their  benefit.^  In  1862,  the 
State  granted  to  the  railroad  companies  title  to  lands  and  other 
property  free  and  clear. ^  Some  of  the  state  bonds  had  gotten  into 
the  hands  of  contractors  and  other  innocent  holders.^  For  many 
years,  the  State  refused  to  recognize  any  of  this  debt.  At  one  time 
the  "Grangers"  and  later  the  national  "Greenback-Labor"  party 
were  prominent  among  the  repudiators.  One  "Granger"  not  only 
wanted  elected  judges  pledged  to  "wipe  out  the  bonds,"  but  was 
ready  to  "wipe  out  the  Supreme  Court"  of  the  United  States  if 
that  court  should  by  any  chance  declare  the  bonds  an  obligation 
of  the  State.  According  to  good  opinion,  the  State  was  able  to  pay 
its  entire  railroad  debt  without  serious  inconvenience.* 

In  1 88 1,  the  Supreme  Court  of  the  State  held  invalid  the  con- 
stitutional amendment  repudiating  the  bonds,^  and  thereby  left 
to  the  legislature  authority  to  settle  the  debt.  At  a  special  session 
of  the  legislature  called  September  19,  1881,  an  act  ^  was  passed 
providing  for  the  settlement  of  the  old  debt  on  the  basis  of  fifty 
cents  on  the  dollar  of  cash  or  new  5%  bonds  for  old  7%  bonds  and 
interest.  On  January  14,  1882,  all  but  $108,000  of  the  $2,275,000 
state  railroad  bonds  had  been  paid  at  this  rate  in  new  bonds  or 
cash.^ 

The  state  legislature  of  Texas  in  1848  passed  an  act  ^  to  provide 
for  ascertaining  and  auditing  the  debt  of  the  late 
Republic  of  Texas  —  interest  on  which  was  in  de- 
fault. When  Texas  seceded  from  Mexico  in  1835,  it  ^^^  ^  popula- 

^  Tenth  Census,  vol.  vii,  pp.  633-34. 

2  Special  Laws  of  M nines ota  (1862),  chaps,  xvn  and  xx,  pp.  226  and  247. 

3  Scott,  The  Repudiation  of  State  Debts  (New  York  and  Boston,  1893),  p.  155. 

*  Lalor's  Cyclopccdia  of  Political  Science  (Chicago,  1884),  vol.  in,  p.  608. 
^  State  V.  Young,  29  Minn.  474. 

^  Laws  of  Minnesota  (1881,  extra  session),  chap.  i. 

'  Tenth  Census,  vol.  vn,  p.  634.  For  interesting  data  bearing  especially  on  the 
legality  of  the  Minnesota  railroad  debt,  see  Minnesota  State  Bonds  (New  York,  1871). 

*  Laws  of  Texas  (1848),  vol.  n,  chap.  143. 


112      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

tion  of  less  than  140,000,  of  whom  only  about  one  third  were  white 
—  the  balance  being  principally  Indians.  The  Republic  had  its 
independence  to  maintain,  Indian  marauders  to  keep  ofif,  and  the 
other  expenses  of  government  to  meet.^  For  a  large  part  of  its 
debt,  it  was  claimed,  Texas  had  not  received  anywhere  near  face 
value.  The  state  authorities  divided  the  debt  into  three  classes 
on  the  basis  of  the  estimated  value  of  the  claims.  The  entire 
amount,  including  interest,  was  given  as  $9,647,253.14,  to  which 
was  assigned  a  value  of  $4,807,764.37. 

On  this  basis  it  was  proposed  to  settle  the  debt.  When  Texas 
had  become  a  State,  the  United  States  had  possessed  itself  of 
certain  customs  resources  which  had  been  pledged  to  secure  the 
debt  of  the  RepubHc.^  In  the  Texas  "boundary  bill,"  ^  the  United 
States,  for  the  sake  of  including  in  New  Mexico  certain  territory 
claimed  by  Texas,  agreed  to  pay  Texas  $10,000,000  in  5%  bonds, 
provided  that  only  $5,000,000  should  be  issued  until  creditors  of 
Texas  had  released  the  United  States  from  all  claims  on  account 
of  customs  pledged.  The  second  five  million  never  was  received 
because  the  State  could  not  comply  with  the  conditions.^  Febru- 
ary 28,  1855,  the  United  States  appropriated  $7,750,000  in  cash 
and  apportioned  it  among  those  creditors  of  Texas  claiming  against 
the  United  States.^  At  the  close  of  1856,  the  State  was  declared 
to  be  out  of  debt.^ 

California  was  in  default  in  interest  in  January,  1854.^  The 
early  debt  had  been  incurred  largely  for  State  ex- 
penses.^ In  1856,  the  Supreme  Court  of  the  State  de- 
clared all  the  surplusage  of  indebtedness  above  the  $300,000  hmit 

1  State  and  City  Supplement  of  the  Commercial  and  Financial  Chronicle,  April  29, 
1893,  p.  175. 

2  Tenth  Census,  vol.  vii,  pp.  600-01. 

3  Acts  of  31st  Congress,  ist  Sess.,  chap,  xlix,  approved  September  9, 1850  (9  U.S. 
Stat,  at  Large,  p.  446).   Teyith  Census,  vol.  vii,  p.  601. 

*  State  and  City  Supplement  of  the  Commercial  and  Financial  Chronicle,  April  29, 
1893,  p.  176. 

^  Acts  of  33d  Congress,  2d  Sess.,  chap,  cxxix,  approved  February  28,  1855  (10 
U.S.  Stats,  at  Large,  p.  617.)  See  Laws  of  Texas  (1855-56),  chap.  l.  For  laws  of  Texas 
passed  to  settle  debt,  see  Laws  of  Texas  (1849-50),  chap,  clvii;  ihid.  (1851-52), 
chaps.  L,  xcviii,  cv.  Various  subsequent  provisions  were  made  for  the  same  purpose. 

*  Tenth  Census,  vol.  vn,  p.  601. 

''  Bankers'  Magazine  and  Statistical  Register,  December,  1854,  p.  488. 
^  Tenth  Census,  vol.  vii,  p.  644. 


STATE  BONDS  II3 

fixed  by  the  Constitution  of  1849  null  and  Void.^  In  April,  1857, 
the  legislature  passed  an  act  ^  calling  in  the  various  illegal  issues 
and  authorizing  $3,900,000  new  bonds  to  be  exchanged  for  the 
old.  In  April,  i860,  another  act  ^  was  passed  authorizing  $200,000 
additional  bonds  to  adjust  an  error  in  the  original  refunding. 

The  third  period  of  difficulties  with  state  bonds  —  from  the 
time  of  the  Civil  War  down  to  the  early  nineties  —  may  be  called 
the  true  period  of  repudiation.  It  is  concerned  only  Third  period 
with  the  Southern  States.-*  The  causes  of  the  de-  comprom^ise 
faults  and  repudiations  of  most  of  the  Southern  or  repudiation 
States  during  this  period  were  in  part  the  same  and  in  part  differ- 
ent from  the  causes  of  the  earliest  defaults  discussed  above.  There 
was  the  same  lack  of  understanding  of  the  proper  purposes  for 
which  state  debts  should  be  created  and  the  same  inadequate  idea 
of  the  proper  management  of  state  finances.  There  was  in  addition 
the  weakening  of  the  South  by  the  Ci\dl  War.  Before  the  war, 
the  Southern  States,  as  a  whole,  were  wealthy  and  prosperous. 
In  i860,  the  total  assessed  valuation  of  Virginia,  North  CaroHna, 
South  Carolina,  Georgia,  Florida,  Alabama,  Mississippi,  Louisiana, 
Arkansas,  Tennessee,  and  Missouri  was  $4,332,901,458,  and  in 
1880  the  total  assessed  valuation  of  the  same  States,  with  the 
addition  of  West  Virginia,  was  $2,232,790,584.^  This  was  partly 
owing  to  the  removal  of  slaves  from  the  list  of  taxable  property 
and  partly  owing  to  a  general  undervaluation  of  property.^  There 
was,  however,  a  real  loss  from  the  point  of  view  of  raising  taxes. 

In  addition  to  the  economic  weakening  of  the  South  on  account 
of  the  war,  there  was  in  most  of  the  States  so-called  "carpet-bag" 
government  with  all  its  incompetency  and  dishonesty.   As  far  as 

^  Nougues  V.  Douglass  el  al.,  7  Cal.  65.  Constitution  of  California  (1849),  art. 
vni. 

*  Statutes  of  California  (1857),  chap.  ccxLiv,  approved  April  28,  1857. 
'  Ibid,  (i860),  chap.  cccLxiii,  approved  April  30,  i860. 

*  The  Fourteenth  Amendment,  section  4,  of  the  Constitution  of  the  United  States, 
ratified  by  three  fourths  of  the  States  before  the  close  of  1868,  reads:  "But  neither 
the  United  States,  nor  any  State  shall  assume  or  pay  any  debt  or  obligation  incurred 
in  aid  of  insurrection  or  rebellion  against  the  United  States,  or  any  claim  for  the  loss 
or  emancipation  of  any  slave;  but  all  such  debts,  obligations,  and  claims  shall  be  held 
illegal  and  void." 

^  Tenth  Census,  vol.  vil,  pp.  4  and  16. 

'  See  the  Tenth  Census,  vol.  vii,  for  estimated  true  values  of  property  in  the  given 
States  in  i860  and  1880. 


114     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

misappropriations  go,  these  have  been  referred  to  as  not  exceed- 
ing $20,000,000.^  The  irregularities  in  the  handling  of  state  debts 
were  so  numerous  and  so  complicated,  however,  that  it  is  impos- 
sible to  estimate  with  any  accuracy  the  losses  from  this  source.  In 
this  period  Virginia,  North  Carolina,  South  Carolina,  Georgia, 
Florida,  Alabama,  Tennessee,  Louisiana,  Arkansas,  and  Missouri 
defaulted  in  interest  or  compromised  or  repudiated  the  principal 
of  their  bonds,  and  Virginia  and  West  Virginia  began  the  dispute 
about  West  Virginia's  share  of  the  ante-Civil  War  debt  of  Virginia. 
Some  of  the  States  for  many  years  were  in  a  condition  of  chronic 
default. 

Virginia  defaulted  in  interest  July  i,  1861.^  Previous  to  the 
Civil  War,  the  State  had  met  every  liability  for  principal  and 
interest  "faithfully  and  promptly."  The  debt,  con- 
tracted chiefly  for  railroads,  canals,  turnpikes,  and 
public  buildings,  was  described  later  as  "free  from  the  taint  of 
extravagance,  fraud,  or  doubt."  ^  On  July  i,  1867,  after  settling 
for  the  back  interest  with  new  bonds,  the  State  resumed  cash 
interest  payments  at  the  rate  of  4%  and  issued  coupons  or  cred- 
ited registered  holders  for  the  remainder  of  interest  due. 

January  i,  1869,  the  State  again  defaulted.^  The  property  of 
the  people  was  much  reduced,  and  the  task  of  raising  revenue 
under  the  conditions  left  by  the  war  was  not  an  easy  one.^  By 
January  i,  1871,  the  debt,  through  accumulations  of  interest, 
had  mounted  to  $47,390,839.96.^  To  meet  the  situation,  the  legis- 
lature passed  the  Funding  Bill  of  1871.^  This  provided  that  for 
one  third  of  the  old  debt  and  interest,  except  the  5  %  dollar  bonds 
and  the  sterling  bonds, ^  a  certificate  should  be  issued  payable  in 
accordance  with  the  settlement  made  between  Virginia  and  West 
Virginia  and  that  for  the  other  two  thirds  there  should  be  issued 

^  North  American  Review,  August,  1884,  p.  141. 
^  Commercial  and  Financial  Chronicle,  vol.  13,  p.  139. 

'  North  American  Review,  February,  1882,  p.  150.  Commercial  and  Financial 
Chronicle,  vol.  12,  p.  360;  vol.  14,  p.  175. 

*  Commercial  and  Financial  Chronicle,  vol.  13,  p.  139. 

*  North  American  Review,  I<"ebruary,  1882,  p.  151. 

^  Commercial  and  Financial  Chronicle,  vol.  12,  p.  360. 
^  Acts  of  Virginia  (1870-71),  chap.  282. 

*  The  5%  dollar  bonds  were  funded  in  the  same  way,  but  with  new  5%  bonds  in- 
stead of  6%;  and  the  sterling  bonds  were  treated,  with  certain  adjustments,  on  the 
same  basis. 


STATE  BONDS  II5 

new  6%  bonds  payable  in  thirty-four  years.  The  coupons  on  the 
new  or  "consolidated"  bonds  were  to  be  receivable  for  taxes  and 
.other  dues.  Under  this  act  there  was  exchanged  something  hke 
two  thirds  of  the  old  debt.^ 

Then  a  new  spirit  came  over  Virginia's  dreams.  The  so-called 
"Readjusters"  appeared  upon  the  scene. ^  In  December,  1871, 
they  put  through  the  legislature  a  resolution  for  discontinuing 
the  funding  of  the  state  debt.^  The  State  failed  to  pay  interest 
due  in  January,  1872,  although  there  were  sufficient  funds  in  the 
Treasury.^  The  claim  was  made  that  the  people  were  too  poor  to 
take  care  of  the  debt  —  a  claim  hardly  borne  out  by  facts.^  March 
7,  1872,  the  legislature  passed  over  the  governor's  veto  an  act  ^ 
repealing  the  receivability  of  coupons  for  taxes  and  other  public 
dues.  The  legislature  also  agreed  to  pay  4%  interest  to  holders 
of  the  "consolidated"  bonds  who  acquiesced  in  the  repeal  of  the 
tax-receivable  feature  of  the  coupons.''  This  was  the  origin  of  the 
class  of  bonds  known  as  "pealers."  ^  The  Supreme  Court  of  Ap- 
peals of  Virginia,  however,  held  that  the  State  must  receive  the 
coupons  for  taxes.^ 

The  panic  of  1873  prostrated  business  and  diminished  the  reve- 
nues of  the  State. ^°  In  1874,  Governor  Kemper  in  a  message  to  the 
General  Assembly  declared  the  State  unable  to  fulfill  all  the  con- 
ditions of  the  Funding  Act  of  1871.^^  Default  was  made  in  interest 
January,  1874.^^  In  1879,  the  legislature  passed  an  act  known  as 
the  McCulloch  Bill,^^  which  provided  for  refunding  a  part  of  the 
debt  with  new  bonds  bearing  3%  interest  for  ten  years,  4%  for 
twenty  years,  and  5%  for  ten  years.  The  coupons  from  these 
bonds  were  to  be  receivable  for  taxes.  This  act  was  acceptable  to 

^  Commercial  and  Financial  Chronicle,  vol.  14,  p.  151.   Up  to  December  i,  1871, 
$21,610,691  consols  were  issued.   (Tenth  Census,  vol.  vn,  p.  557.) 
^  North  American  Review,  February,  1882,  p.  151. 
'  Commercial  and  Financial  Chronicle,  vol.  13,  p.  839. 

*  Ibid.,  vol.  14,  pp.  51  and  175.  ^  Ibid.,  vol.  14,  p.  175. 

*  Acts  of  Assembly  (1871-72),  chap.  148. 

^  Commercial  and  Financial  Chronicle,  vol.  14,  p.  323. 
®  See  American  Law  Review,  vol.  xxin,  p.  927. 
'  Antoni  v.  Wright,  22  Gratt.,  833. 
^*  North  American  Review,  February,  1882,  p.  152. 
^^  Commercial  and  Financial  Chronicle,  vol.  18,  p.  350. 
12  Ibid.,  vol.  18,  p.  598. 
^'  Acts  of  Virginia,  (1878-79,  Special  Session),  chap.  24. 


Il6      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

creditors,  and  under  it  a  portion  of  the  debt  was  exchanged  for 
new  "ten-forty  dollar  bonds."  ^ 

Later,  the  political  complexion  of  the  Government  changed, 
refunding  ceased,  and  interest  on  the  "ten-forties"  was  defaulted.^ 
In  1880,  the  Supreme  Court  of  Appeals  of  the  State  held  the  Mc- 
Culloch  law  constitutional  and  the  coupons  receivable  in  full  for 
taxes.^  The  " Readjusters "  triumphed,  however,  in  1882  with  the 
enactment  of  two  laws  known  as  the  "Coupon-Killers"^  —  the 
effect  of  which  as  interpreted  was  to  prevent  the  receipt  of  any 
large  amount  of  coupons  for  taxes  —  and  a  law  known  as  the 
Riddleberger  Act  ^  for  the  settlement  of  the  debt.  This  act,  after 
leaving  to  West  Virginia  provision  for  one  third  of  the  old  debt 
(1861)  or  its  equivalent,  provided  for  scaling  various  classes  of 
the  remainder  from  20%  to  47%. 

For  many  years,  the  bonds  issued  under  this  act  were  the  only 
bonds  of  the  State  receiving  interest  in  cash.  The  "consols"  re- 
ceived no  interest  in  cash  and  the  "pealers"  no  interest  at  all  from 
1874,  and  the  "ten-forties"  received  no  cash  interest  after  July, 
1880.^  The  bondholders  made  various  unsuccessful  attempts  to 
obtain  satisfactory  terms.'  Finally,  in  1891,  after  several  months 
of  negotiations,  the  bondholders  and  the  representatives  of  the 
State  arrived  at  a  basis  of  settlement.^  After  certain  adjustments, 
the  principal  and  interest  of  the  state  debt  July  i,  1891,  was  de- 
termined to  be  $28,616,972.98.  The  "Olcott  Plan,"  allowing  for 
a  certain  amount  of  bonds  as  probably  lost,  assumed  the  debt  to 
be  in  round  numbers  $28,000,000.^  In  exchange  for  this,  it  pro- 
posed to  issue  $19,000,000  new  bonds  payable  in  one  hundred 
years  and  bearing  2%  interest  for  ten  years  and  3%  for  ninety 
years.  The  coupons  were  not  to  be  receivable  for  taxes.  The 
different  classes  of  bonds  funded  were  to  receive  new  "century" 

*  Up  to  October  i,  1879,  there  were  issued  of  these  $8,049,450.  {Tenth  Census, 
vol.  VII,  p.  559.) 

2  Seventh  Annual  Report,  Council  of  the  Corporation  of  Foreign  Bondholders, 
p.  66. 

'  Williamson  v.  Massey,  33  Gratt.  237. 

*  Acts  of  Assembly  (1881-82),  chaps.  7  and  41.  See  Parsons  v.  Marye  and  others, 
23  Fed.  Rep.  113  (Circuit  Court,  E.  D.  Virginia,  Feb.  11,  1885). 

*  Acts  of  Assembly  (1881-82),  chap.  84,  approved  February  14,  1882. 
'  Commercial  and  Financial  Chronicle,  vol.  56,  p.  636. 

'  See  ibid.,  vol.  44,  p.  627.         »  ll)id,^  vol.  57,  p.  565.        •  Ibid.,  vol.  56,  p.  636. 


STATE  BONDS  II7 

bonds  in  proportions  varying  from  60%  to  75%  of  principal 
with  similar  adjustments  for  interest.  This  plan  was  embodied 
in  an  act  approved  February  20,  1892.^  In  December,  1893,  Gov- 
ernor McKinney  stated  that  $24,547,358  old  bonds  had  been  re- 
ceived in  exchange  for  new  bonds  and  canceled.  Four  semiarmual 
interest  payments  had  been  met  promptly.^  Later,  the  reduction 
of  the  debt  was  begun  through  purchases  of  bonds  for  the  sinking 
fund.^  The  debt  history  of  Virginia  since  the  Civil  War  has  been 
a  checkered  one. 

The  constitution  of  West  Virginia,  adopted  in  1863,  provided 
that  West  Virginia  should  assume  an  "equitable  portion"  of  the 
public  debt  of  Virginia  as  it  was  before  January  i,  y-   ■  • 

1861.^  Later  negotiations  for  an  adjustment  of  the 
debt  were  begun  between  the  two  States.^  March  30,  1871,  the 
legislature  of  Virginia  passed  a  funding  bilP  which  provided, 
among  other  things,  that  one  third  of  the  old  Virginia  debt  should 
be  funded  with  certificates  payable  in  accordance  with  the  settle- 
ment thereafter  made  between  the  two  States.  Virginia  claimed 
that  $15,239,370.74  properly  was  chargeable  to  West  Virginia  on 
the  ground  that  the  new  State  contained  one  third  of  the  terri- 
tory and  population  of  the  old  State.^  West  Virginia,  on  the 
other  hand,  claimed  that  her  share  was  not  over  $953,360.23  on 
the  basis  of  the  net  amounts  expended  and  invested  in  her  terri- 
tory up  to  January  i,  1861.^  The  negotiations  dragged  on  for 
years.^ 

In  March,  191 1,  however,  the  United  States  Supreme  Court 
held  West  Virginia  liable  for  a  principal  debt  of  $7,182,507.46  and 

^  Acts  of  Assembly  (1891-92),  chap.  325,  as  amended  by  Acts  of  Assembly  (1893- 
94),  chap,  no,  and  by  Acts  of  Assembly  (1897-98),  chaps.  113  and  287.  See  Com- 
mercial aitd  Financial  Chronicle,  vol.  56,  p.  802;  vol.  57,  p.  1053.  The  time  for  accept- 
ing the  Olcott  settlement  was  extended  from  time  to  time  until  December  31,  1914, 
with  authority  given  to  the  sinking-fimd  commissioners  to  extend  one  year  more. 
(State  and  City  Section,  Commercial  and  Financial  Chronicle,  November  21,  1914, 
p.  169.) 

^  Commercial  and  Financial  Chronicle,  vol.  57,  p.  1053.        *  Ihid.,  vol.  58,  p.  357. 

*  Constitution  of  West  Virginia  (1863),  art.  vni,  sec.  8. 

*  Tenth  Census,  vol.  vii,  p.  564. 

'  Acts  of  Virginia  (1S70-71),  chap."282. 

^  International  Review,  November,  1880,  p.  568.   Tenth  Census,  vol.  vn,  pp.  564-65. 

'  Tenth  Census,  vol.  vii,  p.  565. 

'  See  Commercial  and  Financial  Chronicle,  vol.  56,  p.  637;  vol.  58,  pp.  51  and  444. 


Il8      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

left  the  question  of  interest  for  adjustment  between  the  parties.^ 
The  commissioners  of  the  two  States  again  failed  to  agree. ^  In 
June,  1914,  the  United  States  Supreme  Court  ordered  a  special 
master  to  take  additional  testimony.^  On  June  14,  1915,  the  court 
sustained  in  practically  every  particular  the  findings  of  the  mas- 
ter. Allowing  for  a  net  credit  to  West  Virginia  as  of  January  i, 
186 1,  of  $2,966,885.18  and  adding  to  the  principal  of  the  debt 
$8,178,307.22  for  interest  up  to  July  i,  1915,  the  court  held  the 
total  amount  due  by  West  Virginia  as  $12,393,929.50.  The  court 
ordered  a  charge  of  5%  interest  on  the  total  amount  awarded  by 
the  decree  from  the  date  of  entry  until  the  debt  be  paid.  It 
ordered  costs  divided  evenly  between  the  two  States.  Whether 
the  legislature  of  West  Virginia  settles  in  accordance  with  the 
decision  of  the  Supreme  Court  remains  to  be  seen.^ 

In  1868,  North  Carolina  settled  the  back  interest  on  all  but  its 
Civil  War  debt  with  new  6%  bonds.^  The  debt  had  been  contracted 
largely  for  railroads.^  Some  of  the  efforts  to  give  aid 
resulted  disastrously,  and  in  other  cases  the  agents 
of  the  State  wasted  the  funds.'^  Governor  Caldwell  in  187 1  de- 
clared that  for  many  of  the  "  special  tax  "  bonds,  issued  in  exchange 
for  railroad  and  canal  stock,  the  State  received  only  from  ten  to 
thirty  cents  in  currency  on  the  dollar,  and  for  certain  railroad-aid 
bonds,  less  than  fifty  cents  in  specie.^  October  i,  1876,  the  total 
debt  of  the  State  was  given  as  $41,846,930.45.  Of  this,  over 
$13,000,000  was  unpaid  interest.^ 

Governor  Vance,  in  a  message  to  the  general  assembly  in  1879, 
claimed  that  the  State  was  under  no  moral  obligation  to  pay  the 
debt  at  face  value.  He  said:  "Quite  one  half  of  our  property  upon 
which  our  bonds  were  based,  was  wantonly  destroyed  by  consent 
of  a  large  majority  of  those  who  held  them.  ..."  He  declared 
that  practically  all  the  special  tax  bonds  were  ''not  binding  either 

*  Virginia  v.  West  Virginia,  220  U.S.  i;  31  S.C.  330;  55  L.E.  353. 

2  See  Virginia  v.  West  Virginia,  231  U.S.  89;  34  S.C.  29;  58  L.E.  135. 
'  Virginia  v.  West  Virginia,  234  U.S.  117.   For  summary  of  report  of  Master,  see 
Commercial  and  Financial  Chronicle,  vol.  100,  p.  414. 

*  See  Commercial  and  Financial  Chronicle,  vol.  100,  p.  2099. 

s  Ibid.,  vol.  6,  p.  748.  ^  Tenth  Census,  vol.  vii,  p.  567. 

^  Commercial  and  Financial  Chronicle,  vol.  12,  p.  263. 
8  Ibid.,  vol.  13,  pp.  740-41;  vol.  17,  p.  803. 
^  Ibid.,  vol.  23,  p.  599. 


STATE  BONDS  II9 

in  law  or  good  morals."  ^  An  amendment  to  the  State  Constitu- 
tion ^  was  adopted  and  ratified  later  by  popular  vote  forbidding 
payment  of  the  following  bonds  unless  the  proposal  to  pay  them 
shall  have  been  ratified  by  a  majority  of  all  the  voters  of  the 
State:  special  tax  bonds,  $11,366,000;  Chatham  Railroad  bonds, 
$1,030,000;  WilHamston  and  Tarboro  Railroad  bonds,  $150,000; 
penitentiary  bonds  of  1868,  $44,000.  These  bonds  still  are  un- 
paid.^ 

In  1879,  the  legislature  also  passed  funding  laws  ^  providing 
substantially  as  follows:  (i)  for  the  issue  of  4%  bonds  due  in  19 10 
to  fund  ante- war  bonds  at  40%  of  face  value,  railroad  bonds 
recognized  as  vahd  at  25%  of  face  value,  and  funding  bonds  of 
1866  and  1868  at  15%  of  face  value,  nothing  being  given  for  over- 
due coupons;  (2)  for  the  issue  of  6%  bonds  due  in  1919  in  exchange 
for  North  Carolina  railroad  construction  bonds  at  par,  holders 
of  construction  bonds  abating  $240  of  overdue  interest  on  each 
$1000  bond.  Various  attempts  have  been  made  since  to  enforce 
payment  of  the  special  tax  bonds. ^  In  1905,  as  the  result  of  a  de- 
cision by  the  United  States  Supreme  Court,^  settlement  was  made 
for  a  small  amount  of  bonds  secured  by  stock  of  the  North  Caro- 
lina Railroad.''  In  1913,  the  legislature  passed  an  act  ^  authoriz- 
ing the  payment  of  a  small  amount  of  unfunded  bonds  in  cash  at 
fifteen,  twenty-five,  and  forty  cents  on  the  dollar  of  principal  on 
the  basis  of  the  Funding  Act  of  1879.  The  debt  history  of  North 
Carolina  shows  the  unfortunate  results  of  a  heavy  debt  incurred 
to  a  considerable  extent  without  value  received. 

During  the  Civil  War,  South  Carohna  became  in  arrears  in  in- 
terest.^  March  23, 1869,  an  act  ^°  was  passed  to  pro- 

.,.,--  .  ,  ..,,_,,.       South  Carolina 

vide  for  the    conversion  of  state  securities.     This 

^  Commercial  and  Financial  Chronicle,  vol.  28,  p.  69. 
i    2  Constitution  of  North  Carolina  (1868,  as  amended  1879),  ^.rt.  I,  sec.  6. 

'  Thirty-ninth  Annual  Report,  Council  of  the  Corporation  of  Foreign  Bondholders, 
p.  366. 

*  Laws  of  North  Carolina  (1879),  chaps.  98  and  138. 

^  See  Commercial  and  Financial  Chronicle,  vol.  85,  p.  iioo;  vol.  86,  p.  121;  vol.  90, 
p.  249;  vol.  92,  pp.  477  and  610. 

^  South  Dakota  v.  North  Carolina,  192  U.S.  286  (1904). 
^  See  Commercial  and  Financial  Chronicle,  vol.  80,  p.  1382. 

*  Public  Laws  of  North  Carolina  (1913),  chap.  131.   Cf.  ibid.  (1879),  chap.  98. 
'  Commercial  and  Financial  Chronicle,  vol.  13,  p.  622, 

^  Acts  of  South  Carolina  (1868-69),  do-  iSQ- 


120      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

act  provided  for  funding  the  old  debt  and  interest  with  new  securi- 
ties bearing  the  same  rates  of  interest  as  the  old.  The  state  debt 
history  of  South  Carolina  goes  back  to  1794  and  includes  the  issue 
of  bonds  in  aid  of  banks  and  railroads.^  After  the  Civil  War,  the 
State  suffered  under  an  extreme  example  of  "carpet-bag"  gov- 
ernment.^ Much  of  the  State's  money  was  stolen  or  wasted.^ 
Apparently  bonds  were  issued  largely  in  excess  of  the  amounts 
authorized  by  law,  and  railroad  securities  were  endorsed  on  a 
wholesale  scale.  According  to  a  report  of  a  committee  of  the  legis- 
lature during  the  session  of  1871-72,  there  had  been  created 
direct  and  contingent  Habilities  amounting  to  $28,977,608.20  for 
the  existence  of  a  large  part  of  which  no  adequate  reason  could  be 
given.  The  State  was  declared  to  be  virtually  bankrupt.^  In 
January,  1872,  the  State  again  defaulted  in  interest.^ 

In  1873,^  the  legislature  passed  an  "act  to  reduce  the  volume 
of  the  public  debt  and  to  provide  for  the  payment  of  the  same."  ^ 
This  act  declared  void  $5,965,000  bonds  issued  for  the  conversion 
of  the  State  debt,  on  the  ground  that  these  were  put  on  the  mar- 
ket without  authority  of  law.  It  provided  further  that  the  re- 
mainder of  the  debt  should  be  funded  at  fifty  per  cent  of  its  face 
value  and  interest  from  1872  into  new  6%  "green  consols."  Up 
to  October  31,  1875,  there  had  been  funded,  under  the  Act  of 
1873,  $7,220,512.65  of  the  old  debt.^ 

At  various  times,  up  to  1877,  interest  on  all  or  a  part  of  the 
debt  was  in  default.^  Legislative  investigating  committees  in 
1877  reported  $3,608,707  treasury  vouchers  issued  without  proper 

^  Commercial  and  Financial  Chronicle,  vol.  12,  p.  297. 

^  Ibid.,  vol.  13,  pp.  622-23.  International  Review,  November,  1880,  pp.  576-77. 

^  The  liberality  of  the  legislature  to  itself  and  its  friends  extended  at  one  time  to 
having  fitted  up  a  room  in  the  State  House  wherein  to  serve  "  wines,  liquors,  eatables, 
and  cigars  to  state  officials,  senators,  members  of  the  House  and  their  friends,  at  all 
hours  of  the  day  and  night."  {Report  of  the  Joint  Investigating  Committee  on  Public 
Frauds,  etc.,  1877-78,  quoted  in  Scott,  The  Repudiation  of  State  Debts  [New  York 
and  Boston,  1893],  Appendix  vi,  p.  314.) 

*  Tenth  Census,  vol.  vii,  p.  572. 

^  Commercial  and  Financial  Chronicle,  vol.  18,  p.  317. 

'  The  governor  in  a  message  referred  to  the  debt  of  the  State,  October  31,  1873, 
as  $15,851,627.35.     Tenth  Census,  vol.  vii,  p.  574. 

^  Acts  of  South  Carolina  (Special  Session,  1873),  no.  427. 

^  Tenth  Census,  vol.  vii,  p.  575. 

'  See  Commercial  and  Financial  Chronicle,  vol.  21,  pp.  224,  231,  535,  614;  vol.  23, 
p.  57;  vol.  24,  p.  445. 


STATE  BONDS  121 

legal  authority  and  the  overissue  of  $1,000,000  of  a  loan  for  the 
payment  of  interest  on  the  public  debt.  March  22,  1878,  there 
was  established  by  joint  resolution  a  court  of  claims,  with  the 
idea  of  trying  to  straighten  out  the  state  finances.^  In  1879,  the 
Supreme  Court  of  the  State  declared  illegal  certain  bonds  in- 
cluded in  the  refunding  under  the  Act  of  1873.^  Invalidity  was 
discovered  to  a  considerable  extent  among  the  "green  consols."  ^ 

The  final  adjustment  took  place  under  an  act  approved  Decem- 
ber 24,  1879,  and  amended  February  20,  1880.^  All  vaHd  "green 
consols"  and  vahd  portions  were  exchangeable  at  par  with  in- 
terest to  July  I,  1878,  for  new  "brown  bonds"  printed  from  the 
same  plates.^  A  writer  in  the  "International  Review"  in  1880 
held  that  South  Carolina  had  the  best  excuse  for  repudiation  of 
aU  of  the  States.^ 

An  act  ^  was  passed  in  1871  "to  protect  the  people  of  the  State 
of  Georgia  against  the  illegal  and  fraudulent  issues  of  bonds.  .  .  ." 
Under  authority  of  the  state  constitution  of  1868, 
endorsements  of  railroad  bonds  were  permitted  for 
not  over  one  half  the  cost  of  the  road  and  provided  that  the  State 
should  have  a  first  lien  on  the  property.^  Accordingly,  up  to  March 
16,  1871,  the  State  had  endorsed  $5,923,000  railroad  bonds.^  Fur- 
thermore, under  the  rule  of  the  "carpet-baggers,"  Georgia  was 
plunged  into  debt  for  all  sorts  of  alleged  public  improvements. 
Later,  claims  were  made  of  the  issue  of  bonds  in  excess  of  the 
amount  provided  by  law,  of  fraud,  and  of  other  irregularities.^" 

^  Tenth  Census,  vol.  vn,  pp.  576-77.  Acts  of  South  Carolina  (1877-78),  Joint  Reso- 
lution no.  99,  p.  669. 
2  Walker  v.  State  of  South  Carolina,  12  S.C.  200  (1879). 

*  Commercial  and  Financial  Chronicle,  vol.  28,  p.  18. 

*  Acts  of  South  Carolina  (1879),  no.  186.  Ibid.  (1880,  Extra  Session),  no.  224. 

^  December  19,  1904,  the  United  States  Supreme  Court  affirmed  the  decision  of 
the  United  States  Circuit  Court  in  the  case  of  Lee  v.  Robinson  and  declared  the 
revenue  bond  scrip  of  this  State  to  be  void.  (196  U.S.  64.)  Under  Act  of  March  2, 
1872,  $1,800,000  of  this  scrip  had  been  issued.  {Commercial  and  Financial  Chronicle, 
vol.  80,  p.  725.)  The  act  was  passed  over  the  veto  of  the  governor,  March  2,  1872- 
{Acts  of  South  Carolina  [1871-72],  no.  65.) 

*  International  Review,  November,  1880,  p.  576. 
^  Georgia  Laws  (1871-72),  no.  5. 

'  Constitution  of  Georgia  (1868),  art.  in,  sec.  vi,  sub-sec.  5. 
'  Commercial  and  Financial  Chronicle,  vol.  12,  p.  360. 

*"  Lalor's  CyclopcEdia  of  Political  Science  (Chicago,  1884),  vol.  m,  p.  606.  See  Pre- 
amble of  Georgia  Laws  (1871-72),  no.  5. 


122      AlklERICAN  AND  FOREIGN  INVESTMENT  BONDS 

The  legislature  in  1872  declared  void  $3,982,000  state  bonds 
and  state  endorsements  of  $4,475,000  railroad  bonds.^  An  amend- 
ment -  to  the  constitution  in  1877  provided  that  numerous  issues 
of  bonds  never  should  be  paid.  The  principal  of  the  defaulted  debt 
of  Georgia  in  191 2,  according  to  the  Council  of  the  Corporation  of 
Foreign  Bondholders,  was  $12,757,000.^  In  justice  to  Georgia,  it 
must  be  said  that,  while  her  resources  probably  were  sufficient 
to  take  care  of  her  entire  debt,^  she  suffered  in  common  with  other 
Southern  States  through  incompetent  and  dishonest  government 
in  the  Reconstruction  period.^ 

Beginning  in  1823,  Alabama  issued  its  bonds  in  aid  of  banks  and 
other  private  enterprises.  In  the  early  forties,  interest  on  the 
state  debt  was  met  promptly,  though  with  diSiculty. 
After  November,  1861,  interest  payable  in  New 
York  was  defaulted,  but  interest  due  in  London  was  paid  regu- 
larly to  January,  1865.  Later,  the  unpaid  interest  on  bonds  issued 
both  in  London  and  in  New  York  was  settled  with  new  bonds.  A 
similar  settlement  was  made  for  the  principal  of  bonds  which 
matured  in  1863,  1865,  and  1866.^ 

In  18.67  and  1868,  the  legislature  passed  acts^  providing  for 
state  endorsement  of  railroad  bonds  under  certain  conditions. 
Under  this  general  authority,  endorsements  were  made  for  $19,- 
006,000.  The  State  also  issued  $2,300,000  direct  bonds  for  rail- 
roads.^ July,  1872,  the  State  defaulted  in  interest  on  bonds  and 
endorsements  in  aid  of  the  Alabama  and  Chattanooga  Railroad.^ 
The  road  had  become  bankrupt. ^°  In  1873,  an  act  ^^  was  approved 

^  Commercial  and  Financial  Chronicle,  vol.  15,  p.  411.  Georgia  Laws  (1872), 
nos.  I,  2,  3,  4,  5. 

2  Georgia  Constitution  (1868),  art.  3,  sec.  6,  as  amended  May  i,  1877. 

3  Thirty-ninth  Annual  Report,  Council  of  the  Corporation  of  Foreign  Bondholders, 
p.  366. 

^  Investors'  Supplement,  Commercial  and  Financial  Chronicle,  July  31,  1875,  p.  iv. 
International  Review,  November,  1880,  p.  578. 

^  See  Commercial  and  Financial  Chronicle,  vol.  19,  p.  375.  Lalor's  Cyclopaedia  of 
Political  Science,  vol.  iii,  p.  606. 

^  Tenth  Census,  vol.  vn,  pp.  590-92. 

'  Acts  of  Alabama  (1866-67), no.  641,  as  amended  by  £&«/.  (1868), p.  iy;ibid.  (1868), 
no.  3.  See  also  ibid.  (1869-70),  no.  142. 

8  Tenth  Census,  vol.  vii,  p.  593. 

*  Commercial  and  Financial  Chronicle,  vol.  15,  p.  14. 

'"  Ibid.,  vol.  13,  p.  739. 

"  Acts  of  Alabama  (1872-73),  no.  21,  approved  April  21,  1873. 


STATE  BONDS  1 23 

providing  for  the  issue  of  state  bonds  in  place  of  state  endorse- 
ments in  the  ratio  of  one  to  four.  The  new  bonds  were  to  mature 
in  thirty  years  and  bear  7%  interest.  The  State  settled  with  some 
of  the  railroad  companies  on  this  basis. ^ 

In  June,  1875,  the  debt  of  Alabama  was  estimated  as  $31,952,- 
(D00.30,  of  which  $9,691,000  was  contingent  railroad  debt,  $4,- 
696,407  past-due  interest,  and  $2,500,000  estimated  floating 
debt.-  The  taxable  property  of  the  State  at  this  time  was  about 
$159,000,000.^  The  State  was  described  as  in  a  condition  of 
"practical  insolvency."  This  was  held  to  be  due  to  the  bad  effects 
of  the  war,  loss  of  crops,  and  loose  state  and  county  administra- 
tions. A  Southern  newspaper  blamed  the  bondholders  for  sup- 
porting Congress  in  fastening  on  the  people  ''that  thieving  crew" 
who  voted  away  the  State's  credit  "by  the  cart-load."  ^ 

By  an  act  ^  passed  in  1876,  the  debt  was  "adjusted"  to  not 
over  $9,668,423.^  There  were  authorized  $7,000,000  new  bonds 
bearing  interest  at  2%  for  the  first  five  years,  3%  for  the  next  five, 
4%  for  the  next  ten,  and  5%  for  the  final  ten  years;  $1,000,000 
bearing  interest  at  2%  for  the  first  five  years  and  4%  for  the  next 
twenty-five;  and  $596,000  bearing  5%  from  the  beginning.  For 
the  old  general  direct  debt  bearing  5%,  6%,  and  8%  interest,  the 
new  2%,  3%,  4%,  and  5%  bonds  were  given  dollar  for  dollar  with- 
out any  allowance  for  interest;  for  the  7%  state  bonds  issued  in 
the  ratio  of  one  to  four  for  endorsed  railroad  bonds,  the  new 
5%  bonds  were  given  at  the  rate  of  fifty  cents  on  the  dollar  of 
principal,  together  with  a  waiver  of  certain  unpaid  taxes.  In  ex- 
change for  the  endorsed  bonds  of  the  Alabama  and  Chattanooga 
Railroad,  amounting  to  $5,300,000,  there  were  given  the  $1,000,000 
bonds  bearing  2%  for  five  years  and  4%  for  twenty-five  years; 
for  the  $2,000,000  state  bonds  issued  direct  to  the  railroad,  the 
State  released  its  lien  on  the  road  and  transferred  500,000  acres 
of  land.^    There  are  at  present  defaulted  loans  of  the  State  of 

*  Tenth  Census,  vol.  vn,  p.  593. 

^  Commercial  and  Financial  Chronicle,  vol.  20,  p.  582.  ^  Ibid.,  vol.  21,  p.  276. 

*  Ibid.,  vol.  20,  p.  582.  5  ^(^ig  of  Alabama  (1875-76),  no.  38. 

8  Tenth  Census,  vol.  vn,  p.  595.  See  also  Commercial  and  Financial  Chronicle,  vol. 
23,  p.  622. 

'  See  Third  Annual  Report,  Council  of  the  Corporation  of  Foreign  Bondholders, 
pp.  21-22;  Fourth  Report,  pp.  12-17,  and  Fifth  Report,  pp.  lo-ii.  Tenth  Census,  vol, 
vn,  pp.  594-95. 


124      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Alabama,  but  there  are  no  available  records  of  their  amount  and 
character.^ 

Tennessee  issued  bonds  in  aid  of  banks  as  early  as  1832.  The 
State  also  issued  bonds,  from  time  to  time,  in  aid  of  railroad  and 
turnpike  companies.  In  April,  1865,  the  total  state 
liabilities,  including  endorsements  but  not  including 
war  debt,  were  given  as  nearly  $20,000,000.  Small  portions  of  the 
principal  of  the  state  debt  had  matured  from  186 1  to  1864  and  had 
not  been  paid.  The  revenues  of  the  State  in  1865  were  insufficient 
to  pay  current  expenses  and  interest  on  the  debt.  A  large  portion 
of  the  railroad  companies  to  whom  bonds  were  issued  did  not  pay 
the  interest.  From  time  to  time  these  roads  were  sold  and  the 
proceeds  apphed  to  payment  of  the  bonds.  ^  In  1865,  provision 
was  made  for  paying  all  past-due  bonds  and  interest.^ 

In  1866,  $5,958,000  additional  state  bonds  were  authorized  in 
aid  of  railroads.  The  July,  1868,  interest  on  the  debt  was  not  met. 
In  1868,  interest  was  funded.  July  i,  1869,  the  total  liabihties  of 
the  State  were  $39,896,504.55.  Of  this  debt  a  considerable  portion 
was  taken  care  of  through  sale  of  state  interests  in  railroads.^ 
March  17,  1873,  an  act^  was  approved  to  fund  the  legally  issued 
bonds  and  coupons  of  the  State  with  new  6%  bonds. 

The  July,  1875,  interest  was  not  paid.^  The  State  had  difficulty 
in  collecting  taxes.^  In  1879,  the  governor  of  the  State  said  that 
it  had  been  able  to  pay  only  three  installments  of  interest  in  ten 
years.  He  reported  the  debt,  including  interest,  as  $24,274,017.^ 
An  act,  approved  March  28,  1879,  for  funding  the  debt  at  fifty 
cents  on  the  dollar  with  new  4%  bonds,  was  rejected  by  popular 
vote.^  In  188 1,  an  act  was  passed  funding  the  debt  at  par  with 
new  3%  bonds,  but  this  act  was  declared  unconstitutional  by  the 
Supreme  Court  of  the  State. ^°  In  1882,  an  act  was  passed  funding 
the  debt  at  60%  of  the  principal  and  interest  with  new  bonds 

^  Thirty-ninth  Annual  Report,  Council  of  the  Corporation  of  Foreign  Bondholders, 
P-  365- 

2  Tenth  Census,  vol.  vii,  pp.  604-05.        '  Acts  of  Tennessee  (1865-66),  chap.  ix. 

^  Tenth  Census,  vol.  vii,  pp.  605-06.        ^  Acts  of  Tennessee  (1873),  chap.  xxrv. 

^  Commercial  and  Financial  Chronicle,  vol.  21,  p.  87. 

^  Ibid.,  vol.  21,  p.  614.  8  Ibid.,  vol.  28,  p.  44. 

'  Seventh  Annual  Report,  Council  of  the  Corporation  of  Foreign  Bondholders, 
p.  60. 

"  Acts  of  Tennessee  (1881),  chap.  CLXxm.  Lynn  v.  Polk,  76  Tenn.  121  (1881). 


STATE  BONDS  1 25 

bearing  3%  interest  for  two  years,  4%  for  two  years,  5%  for  two 
years,  and  6%  for  twenty-four  years.^  In  1883,  the  state  treasurer 
absconded  leaving  a  large  deficit.  The  legislature  thereupon  re- 
pudiated the  settlement  and  stopped  the  payment  of  the  January 
coupons.^ 

In  the  same  year  the  legislature  passed  an  act  ^  scaling  certain 
portions  of  the  debt  24%,  21%,  and  20%,  and  funding  these  por- 
tions with  bonds  bearing  6%,  s}i%,  and  5%  respectively,  and 
scaling  practically  all  the  rest  of  the  debt  50%  and  funding  it  at 
3%  interest.  Under  an  act  of  1905,^  all  unfunded  bonds,  except 
$335,666.66  held  by  the  United  States  Government,  were  elimi- 
nated from  the  state  debt  as  of  January,  1907. 

In  the  case  of  Tennessee,  there  was  no  reasonable  doubt  about 
the  validity  of  most  of  its  bonds.^  Like  many  others,  the  State 
incurred  a  large  debt  —  sometimes  for  purposes  of  doubtful  value. 
The  State  had  a  good  many  misfortunes,  including  war'and  yellow 
fever.  The  condition  of  the  Southern  States  at  one  time,  according 
to  the  "  Commercial  and  Financial  Chronicle,"  ®  called  for  forbear- 
ance. At  the  same  time  the  treatment  of  their  debts  was  not  such 
as  to  inspire  the  confidence  of  investors. 

Since  the  Civil  War,  Louisiana  has  had  a  debt  history  somewhat 
similar  to  the  debt  histories  of  other  Southern  States.  The  early 
debt  of  the  State  included  bonds  issued  for  railroads 
and  liabilities  incurred  in  aid  of  banks  and  munici- 
palities.'^ In  1866,  the  state  auditor  referred  to  the  great  decrease 
in  taxable  property  since  the  Civil  War,  to  the  difiiculty  of  col- 
lecting taxes,  and  to  the  fact  that  state  currency  was  receivable 
for  public  dues.^  The  legislature  of  1866  authorized  $997,300 
bonds  to  pay  certain  bonds  and  coupons  past  due. 

^  Acts  of  Tennessee  (1881-83,  3d  Extra  Session,  42d  General  Assembly),  chap. 
4,  p.  6. 

"^  Tenth  Annual  Report,  Council  of  the  Corporation  of  Foreign  Bondholders,  p.  92. 
See  Commercial  and  Financial  Chronicle,  vol.  36,  p.  170.  Acts  of  Tennessee  (1883), 
chaps,  n,  rv. 

*  Acts  of  Tennessee  (1883),  chap.  Lxxxiv,  p.  76.  *  Ibid.  (1905),  chap.  393. 

^  International  Review,  November,  1880,  p.  585.  See  Lalor's  Cyclopadia  of  Political 
Science,  vol.  iii,  p.  610. 

^  See  Commercial  and  Financial  Chronicle,  vol.  28,  p.  27,  and  vol.  29,  p.  82. 

^  See  Tenth  Census,  vol.  vn,  p.  597.  For  certain  interesting  phases  of  early  his- 
tory, see  North  American  Review,  January,  1844,  PP-  i37~40- 

*  Commercial  and  Financial  Chronicle,  vol.  4,  p.  233. 


126     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

From  1867  to  187 1,  large  amounts  of  bonds  were  issued  for  levees 
and  in  aid  of  railroads  and  canals.^  In  187 1,  certain  taxpayers 
issued  a  warning  that  the  legislature  was  exceeding  its  powers.^ 
The  total  liabilities  of  the  State  January  i,  1872,  amounted  to 
$41,733,752.^  A  considerable  amount  of  overdue  interest  was 
paid  in  1873.  Later,  a  committee  of  seven  citizens  appointed  by 
the  governor  reported  against  the  validity  of  a  large  part  of  the 
debt,  and  claimed  that  for  a  portion  of  the  remainder  the  State 
had  received  only  from  thirty  to  fifty  cents  on  the  dollar."*  In 
September,  1874,  owing  to  misgovernment  and  impending  bank- 
ruptcy, the  Federal  authorities  placed  General  Emory  tempo- 
rarily in  charge  of  the  State  Government  and  property.^ 

January  24,  1874,  a  funding  act  ^  had  been  passed  providing  for 
an  issue  of  ''consolidated  bonds  of  the  State  of  Louisiana,"  pay- 
able forty  years  from  January  i,  1874,  and  to  bear  7%  interest. 
These  bonds  were  to  be  exchanged  for  all  vaKd  bonds  at  the  rate  of 
sixty  cents  on  the  dollar.  Under  the  same  date,  another  act  ^  was 
passed  proposing  a  constitutional  amendment  to  declare  the  new 
consolidated  bonds  a  vahd  contract  between  the  State  and  the 
holders  of  the  bonds.  May  17,  1875,  Governor  Kellogg,  who  had 
returned  to  power,  signed  an  act  ^  supplemental  to  the  funding 
act.  The  new  law  declared  $14,320,000  bonds,  issued  mostly  for 
levees  and  railroads,  "questioned  and  doubtful."  The  bonds  were 
to  be  passed  upon  by  the  courts.  Under  these  acts,  there  were 
funded  up  to  the  close  of  1878  old  bonds  amounting  to  $19,874,666.^ 

January  i,  1879,  the  State  again  defaulted  in  interest. ^°  The  debt 
ordinance  ^^  of  the  new  constitution  of  the  State,  adopted  July 

^  Tenth  Census,  vol.  vn,  p.  598. 

*  Commercial  and  Financial  Chronicle,  vol.  12,  p.  403. 
'  Tenth  Census,  vol.  vn,  p.  598. 

*  Commercial  and  Financial  Chronicle,  vol.  18,  p.  62.  *  Ibid.,  vol.  19,  p.  283. 
'  Laws  of  Louisiana  (1874,  3d  Leg.,  2d  Sess.),  no.  3.  ''  Ibid.,  no.  4. 

*  Ibid.  (1875,  Extra  Sess.),  no.  11.  Commercial  and  Financial  Chronicle,  vol.  20, 

p.  521. 

*  Sixth  Annual  Report,  Council  of  the  Corporation  of  Foreign  Bondholders,  p.  34. 
On  a  portion  of  the  new  bonds,  the  State  was  in  default  July  i,  1874,  July  i,  1875, 
and  July  i,  1876. 

1"  Commercial  and  Financial  Chronicle,  vol.  28,  p.  42.  Defaults  also  in  1877  and 
1878.   (Scott,  p.  115.) 

'1  Constitution  of  Louisiana  (1879),  art.  i  of  debt  ordinance.  See  Laws  of  Louisi- 
ana (1884),  pp.  74  and  77. 


STATE  BONDS  1 27 

23,  1879,  reduced  the  interest  on  the  consolidated  bonds  to  2% 
for  five  years  from  January  i,  1880,  3%  for  fifteen  years,  and  4% 
thereafter.  Holders  of  the  consolidated  bonds  were  given  the 
option  of  exchanging  them  at  the  rate  of  seventy-five  cents  on  the 
dollar  for  new  bonds  bearing  interest  at  the  rate  of  4%.  This 
action,  together  with  the  repudiation  of  various  issues  of  bonds, 
was  justified  by  those  who  carried  it  out  on  the  grounds  that  at 
one  time  the  State  House  had  been  seized  by  United  States  sol- 
diers, that  the  body  of  men  that  passed  the  fundmg  act  of  1874 
was  not  a  constitutional  legislature,  and  that  the  bondholders 
were  mainly  Northern  capitalists.^  In  June,  1882,  an  amendment 
was  passed,  and  later  ratified  by  the  people,  fbdng  interest  on  the 
consoHdated  bonds  at  2%  for  five  years  from  January  i,  1880, 
and  4%  thereafter. 2  The  Supreme  Court  of  the  United  States  in 
March,  1883,  held  that  whether  or  not  the  debt  ordinance  violated 
the  contract  of  1874  and  therefore  was  unconstitutional,  there  was 
no  remedy.^  The  Council  of  the  Corporation  of  Foreign  Bond- 
holders in  19 1 2  Hsted  $5,627,160  Louisiana  bonds  the  principal  of 
which  was  in  default.^ 

The  only  other  State  to  be  discussed  in  connection  with  defaults 
is  Missouri.  This  State  was  in  default  in  interest  on  its  railroad 
debt  from  186 1  to  1867.  In  the  early  fifties,  Missouri 

111  1    •  T  Ti  11^1  Missouri 

had  loaned  its  credit  on  a  liberal  scale  for  the  con- 
struction of  railroads.  In  1859,  i860,  and  1861,  nearly  all  the 
railroads  which  had  debts  guaranteed  by  the  State  defaulted. 
The  State  became  directly  responsible  for  obhgations  amounting 
to  $23,701,000,  in  addition  to  its  previous  debt  of  about  $1,000,000. 
Later,  much  of  the  railroad  property  was  destroyed.  Furthermore, 
during  the  Civil  War,  the  State  was  obliged  to  incur  large  addi- 
tional indebtedness  for  miHtary  purposes.  The  state  debt  proper 
and  the  new  military  debt  were  taken  care  of  promptly  as  regards 
interest;  and  by  the  end  of  the  war,  the  principal  of  the  military 
debt  had  been  considerably  reduced.    On  January  i,  1865,  the 

*  Lalor's  Cyclopadia  oj  Political  Science,  vol.  in,  p.  606. 

^  Amendment  ratified  April  22,  1884.  See  Laws  of  Louisiana  (1882),  no.  76,  and 
ibid.  (1884),  p.  77. 

'  Louisiana  v.  Jumel,  107  U.S.  711.  New  Hampshire  v.  Louisiana,  108  U.S.  76. 

*  Thirty-ninth  Annual  Report,  Council  of  the  Corporation  of  Foreign  Bondholders, 
p.  366. 


128      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

aggregate  state  debt  was  $36,094,908,  of  which  $24,754,000  repre- 
sented railroad  bonds  which  the  State  had  guaranteed  and  old 
state  bonds  issued  prior  to  the  Civil  War.^ 

In  1867,  the  legislature  passed  an  act  ^  authorizing  a  tax  of  four 
mills  to  be  appKed  to  the  credit  of  the  state  interest  fund,  and 
providing  that  certain  sums  received  from  the  United  States  be 
applied  to  the  payment  of  overdue  coupons.  The  act  also  provided 
for  the  issue  of  six  per  cent  funding  bonds  for  the  remaining  over- 
due coupons.  In  1874,  a  further  funding  act  ^  provided  for  $1,000,- 
000  six  per  cent  twenty-year  funding  bonds  to  be  used  from  time 
to  time  to  pay  maturing  bonds.  So  vigorously  did  Missouri  go 
about  the  work  of  paying  its  debt  that  by  January  i,  1869,  the 
total  debt  had  been  reduced  to  $21,675,000  and  by  January  i, 
1885,  to  $15,243,000.  The  debt  history  of  Missouri  is  a  troubled 
but  an  honorable  one. 

In  the  matter  of  debt  histories,  mention  may  be  made  of  three 

other  States.   In  1840  to  1842,  the  solvency  of  New  York  State 

was  "in  great  jeopardy."  The  State  had  made  loans 

bummary  of  .  . 

state  debt  to  railroads  and  incurred  a  large  debt  for  canals.   In 

1841,  Ohio  had  great  difficulty  in  borrowing  money 
to  continue  work  on  its  system  of  internal  improvements.  Both 
these  States,  however,  always  managed  to  pay  promptly  interest 
and  principal  of  their  debts.  Massachusetts,  during  the  Civil  War, 
when  gold  was  at  a  premium,  agreed  to  pay  interest  and  principal 
of  all  scrip  and  bonds  in  gold  or  silver  coin.^  All  the  other  States 
of  the  Union,  according  to  our  information,  have  clear  records 
for  the  payment  of  their  debts.  The  States  with  longer  histo- 
ries have  had  more  chances  to  get  into  trouble  than  the  younger 
States,  and  also  have  not  always  had  others'  mistakes  to  guide 
them.  Repudiation  has  not  been  confined  to  the  Southern  States; 
though  it  must  be  said  that  the  people  of  those  States  have  shown, 
on  the  whole,  much  less  responsibihty  in  debt  matters  than 
the  people  of  the   North  and  West.    This  may  be  accounted 

1  See  Report,  State  Auditor  of  Missouri  (1883-84),  part  n,  pp.  40,  74  and  ii6, 
and  Tenth  Census,  vol.  vii,  pp.  636-37. 

2  Act  approved  March  12,  1867  {Laws  of  Missouri  [1867],  p.  168),  as  amended  by 
act  approved  March  25,  1868  {ibid.  [1868,  Adj.  Sess.]  p.  174). 

'  Act  approved  March  30,  1874  {Laws  of  Missouri  [1874],  p.  169). 
*  Tenth  Census,  vol.  vn,  pp.  537,  539,  614. 


STATE  BONDS  1 29 

for  partly  by  the  large  percentage  of  negro  population  in  the 
South. 

Our  study  of  the  debt  history  of  the  States  leads  us  to  the  con- 
clusion that  debts  too  large  compared  with  the  property  available 
for  taxation  or  debts  incurred  for  purposes  not  strictly 
public^  are  dangerous.    The  people  of  a  State  are   oAor^ dCubtfuf 
likely  to  refuse  to  pay  when  they  feel  unwilling  to   dangerous^"^^ 
stand  the  burden  of  taxation  necessary  or  when  they 
feel  that  they  have  not  had  their  money's  worth  for  their  bonds- 
The  situation  is  greatly  aggravated  by  the  fact  that  there  is  no 
adequate  legal  remedy  for  bondholders.   As  long  as  the  Eleventh 
Amendment  stands,  "a  sovereign  State  possesses  the  royal  right  of 
snapping  its  fingers  in  its  creditor's  face."  ^  However,  people,  even 
the  most  hght-hearted  in  debt  matters,  are  willing  to  pay  their 
debts  and  maintain  their  credit  when  the  debts  have  been  justly 
incurred  and  when  they  have  plenty  of  resources  with  which  to  pay. 

The  experiences  of  our  States  in  the  creation  and  paymeht  of 
debts  have  had  the  salutary  effect  of  causing  practically  all  the 
States  of  the  Union  to  place  in  their  constitutions   Experience  has 
debt  provisions  which  are,  on  the  whole,  extremely   caused  practi- 
conservative.   Just  as  our  form  of  government,  fed-   states  to  limit 
eral,  state,  and  municipal,  is  largely  the  outgrowth   stitutions  state 
of  our  colonial  experience  in  government,  so  the  Um-     ^  ^'^^  ^°^ 
itations  in  our  state  constitutions  on  the  creation  of  debt  by  the 
States  are  the  outgrowth  of  our  early  experience  in  debt-making. 

Four  States,  however  (New  Hampshire,  Vermont,  Massachu- 
setts, and  Cormecticut) ,  have  no  constitutional  Kmitations  what- 
ever on  the  creation  of  debt.  These  States  have  such   _ 

Four  States 

splendid  financial  records  that  the  necessity  of  im-   have  no 
posing  constitutional  restrictions  on  the  debt-making   limitations 
power  of  the  legislatures  never  has  been  strongly  felt. 
The  present  constitutional  provisions  in  regard  to  the  debt- 

^  There  is  developing  at  the  present  time  in  Canada  an  interesting  situation  and 
one  which  bears  a  striking  resemblance  to  the  situation  in  the  United  States  before 
1840.  The  Dominion  Government  has  guaranteed  bonds  of  the  Canadian  Northern 
and  Grand  Trunk  Pacific  Railways.  The  situation  of  the  companies  is  such  that  the 
Government  may  be  called  on  to  make  good  its  guarantee  and  the  economic  and 
financial  condition  of  Canada  makes  this  problem  full  of  interest.  (See  Boston  Evetu- 
ing  Transcript,  January  11,  1915.) 

2  Lalor's  Cyclopadia  oj  Political  Science,  vol.  m,  p.  613. 


I30     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

creating  power  of  the  remaining  States  of  the  Union  are  grouped 
^    J.  .     about  five  principal  considerations:  — 

Leading  consti-  /   \ 

tutionai  provi-         (i)  Permission  to  borrow  without  limit  for  the  pur- 

sions  governing  .  ,,.         .  .  .         . 

creation  of  posc  of  rcpellmg  mvasion,  suppressmg  insurrection, 

state  debts         ^^  defending  the  State  in  time  of  war. 

(2)  Permission  to  borrow,  usually  Hmited  to  a  small  amount, 
for  the  purpose  of  meeting  casual  deficiencies  in  revenue. 

(3)  Permission  to  borrow  for  some  special  purpose  definitely 
stated  in  the  act  authorizing  the  loan,  provided  that  arrange- 
ments are  made  in  the  act  for  paying  the  interest  and  prin- 
cipal of  the  bonds  and  provided  in  many  cases  that  the  act 
authorizing  the  loan  is  ratified  by  a  vote  of  the  people. 

(4)  Permission  to  issue  bonds  or  notes  to  refund  existing  debt. 

(5)  Prohibition  against  loaning  the  credit  of  the  State  to  private 
enterprises,  engaging  in  works  of  internal  improvement,  or 
loaning  credit  to  political  subdivisions. 

The  above  provisions  may  be  said  to  be  the  standard  constitu- 
tional arrangements  about  the  creation  of  debts  by  States.^ 

The  provision  permitting  unlimited  borrowing  in  case  of  in- 
vasion, insurrection,  or  war  obviously  is  necessary  and  advan- 
tageous.   If  a  State  cannot  protect  itself   against 

Invasion,  .  .  ... 

insurrection,        invasiou,  or  caunot  mamtam  law  and  order,  or  even 
is  unable  to  assist  the  National  Government  in  time 
of  need,  its  very  existence  is  threatened. 

The  provision  allowing  a  State  to  issue  bonds  or  notes  up  to  a 
small  amount  to  take  care  of  casual  deficiencies  in  revenue  or 
other  unexpected  emergencies  is  simply  precaution- 
cies  and  other  ary.  The  amouut  which  a  State  may  borrow  on  this 
emergencies  i^g^gis  should  be  and  usually  is  hmited  very  strictly. 
These  loans  are  in  their  very  nature  temporary  and  are  paid 
usually  out  of  revenues  as  received.^ 

1  For  examples  of  fairly  representative  constitutional  debt  provisions,  see  Constitu- 
tion of  New  York  (1894),  as  amended,  art.  vii,  sees.  1-4,  as  amended  in  November, 
1909,  and  art.  vii,  sec.  12;  Constitution  of  Ohio  (1851),  as  amended  September,  1912, 
art.  vin,  sees.  1-5,  and  art.  xii,  sec.  6;  Constilution  of  Virginia  (1902),  art.  xm,  sees. 
184,  185,  and  187;  Constitution  of  Utah  (1895),  as  amended,  art.  xiv,  sees,  i,  2,  and 
6;  Constitution  of  California  (1879),  as  amended,  art.  rv,  sees.  22,  31;  art.  xn,  see.  13; 
art.  XVI,  sec.  i. 

*  The  constitution  of  Missouri  (1875)  provides  that  such  loans  shall  be  paid  with- 
in two  years.  (Art.  rv,  see.  44.) 


STATE  BONDS  I3I 

The  provision  allowing  a  State  to  borrow  for  some  definite  piece 
of  work,  provided  arrangements  are  made  in  the  act  for  the  pay- 
ment of  the  loan  and  provided  the  people  approve    „        .     , 

i-  srcLir  Borrowing  for 

the  creation  of  the  debt,  is  not  found  in  all  the  state   definite  purpose 

_,    .       ,  r    •  1  when  authorized 

constitutions.    It  is,  however,  a  fairly  common  pro-   by  vote  of  the 
vision.   It  is  under  this  authority  granted  by  its  con-   ^^°^  ^ 
stitution  that  the  State  of  New  York  has  borrowed  large  sums  on 
long-term  bonds  for  highways  and  canals.   It  is  a  provision  which 
in  the  case  of  any  people  not  naturally  careful  about  the  creation 
of  debt  may  be  Uable  to  a  good  deal  of  abuse. 

Prohibition  against  using  the  credit  of  the  State  in  aid  of  private 
enterprises,  which  is  found  in  almost  all  the  consti-    _  

•  1    •       1         T  1        r     1  1  •  Prohibition 

tutions/  IS  the  direct  result  of  the  early  experience   against  loan- 
of  the  States  in  debt-making.  ^^^  ^^^  ' 

In  the  constitutions  of  some  of  the  States  there  are  found  special 
provisions  about  the  proportion  of  debt  to  assessed  valuation, 
about  the  form  of  votes  for  authorizing  debt,  about   ^     .  , 

.  1.11         11111  Special  con- 

the  length  of  time  which  bonds  shall  have  to  run,   stitutionai 
and  various  other  matters.    Sometimes  special  pro-   p"^*^^'^'*^"^^ 
vision  is  made  for  specific  issues  of  bonds,  as  in  the  case  of  Cali- 
fornia ^  for  the  Panama  Pacific  Exposition. 

The  constitution  of  North  Dakota  ^  provides  for  the  certifica- 
tion by  the  auditor  and  secretary  of  state  on  all  state  bonds  that 
the  same  are  issued  pursuant  to  law  and  within  the  LegaHty 
debt  limit.  In  view  of  the  fact  that  a  State  may  ^^'^^^^ 
refuse  to  pay  its  debt,  whether  legally  issued  or  not,  the  question 
of  legaHty  is  not  as  important  in  state  bonds  as  in  municipal 
bonds.  It  should,  however,  always  be  taken  into  consideration. 
This  is  attended  to  usually  by  obtaining  the  opinion  of  competent 
lawyers. 

A  careful   study  of  the  constitutional  provisions   of    all   the 
States  in  regard  to  the  creation  and  payment  of  debts   Substantial 
shows  a   substantial  agreement  on  what  is  sound   cfJatbn°nd^ 
and  wise.   The  provisions  have  almost  a  monotonous   sta^™debts^ 
uniformity. 

^  Contra,  see  Constitution  of  Rhode  Island  (1842),  art.  iv,  sec.  13. 

*  Constitution  of  California  (1879),  art.  iv,  sec.  22,  as  amended  November  8,  1910. 

'  Constitution  of  North  Dakota  (1889),  art.  xii,  sec.  187. 


to 


132      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

On  the  whole,  the  States  of  our  Union,  since  the  early  days  of 
the  rage  for  so-called  internal  improvements  and  since  the  Civil 
^.      .  ,  War  and  carpet-bag  periods  in  the  South,  have  been 

Financial  sta-  ,  r    i     i  •  i 

biiity  depends  excccdmgly  careful  about  creatmg  and  very  conscien- 
e  peop  e  ^jQyg  about  paying  debts.  The  frequent  amendments 
to  the  constitutions  of  some  of  our  Western  and  Southern  States, 
however,  show  that  in  the  last  resort  the  only  reliable  safeguard 
against  the  creation  of  excessive  debts  is  the  disposition  of  the 
people  themselves. 

Another  important  class  of  considerations  in  estimating  the 
credit  of  our  States  is  concerned  with  population.  The  amount  of 
population  and  the  increase  of  population  in  a  State, 
fhe'stateTand  ^s  showing  its  sizc  and  growth,  are  important.  Table 
in'samr"^^^^  -^  ^^^  P^^gG  133)  givcs  the  population  in  1900  and  in 
1 9 10  and  the  percentage  of  increase  from  1900  to 
1910  of  all  our  States.^ 

Table  A  shows  the  greatest  percentage  of  increase  in  population 
in  the  States  of  North  Dakota,  Oklahoma,  Idaho,  Nevada,  and 
Washington  and  the  smallest  percentage  of  increase  in  New  Hamp- 
shire, Vermont,  Iowa,  and  Missouri.  The  credit  of  the  respective 
States  mentioned,  however,  shows  how  dangerous  is  the  taking  of 
any  one  factor  by  itself  as  decisive  in  determining  the  credit  of 
a  State. 

The  character  of  the  population  is  a  far  better  test  of  credit. 
Population  Table  B  (on  page  134)  shows  the  percentage  of  white, 

by  color  negro,  and  all  other  races  to  total  population  in  all 

our  States  in  1900  and  1910,^ 

Table  B  shows  the  States  of  Maine,  New  Hampshire,  Vermont, 
Michigan,  Wisconsin,  Minnesota,  Iowa,  and  Nebraska  all  with  a 
population  99%  or  over  white.  On  the  other  hand,  it  shows  the 
States  of  South  Carolina  and  Mississippi  with  a  white  population 
of  less  than  45%  of  the  whole;  the  States  of  Georgia,  Florida,  Ala- 
bama, and  Louisiana  with  a  white  population  of  only  between 
50%  and  60%;  and  the  States  of  Virginia  and  North  Carolina 
with  a  white  population  between  60%  and  70%.  These  figures 
are  interesting  when  taken  in  connection  with  the  debt  histories 
of  the  various  States. 

'    *  Thirteenth  Census,  Population,  vol.  i,  pp.  30,  32.        ^  Ibid.,  vol.  l,  pp.  I47-S3. 


STATE  BONDS 
TABLE  A 


133 


State 


Alabama 

Arizona 

Arkansas 

California 

Colorado 

Connecticut.  .  . 

Delaware 

Florida 

Georgia 

Idaho 

Illinois 

Indiana 

Iowa 

Kansas 

Kentucky 

Louisiana 

Maine 

Maryland 

Massachusetts.  . 

Michigan 

Minnesota , 

Mississippi 

Missouri 

Montana 

Nebraska 

Nevada 

New  Hampshire . 

New  Jersey 

New  Mexico .  . . . 

New  York 

North  Carolina . 
North  Dakota .  . 

Ohio 

Oklahoma 

Oregon 

Pennsylvania.  .  . 
Rhode  Island .  .  . 
South  Carolina . . 
South  Dakota. . . 

Tennessee 

Texas 

Utah 

Vermont 

Virginia 

Washington 

West  Virginia .  . . 

Wisconsin 

Wyoming 


Population 


igoo 


1,828,697 

122,931 

1,311,564 

1,485,053 

539,700 

908,420 

184,735 

528,542 
2,216,331 

161,772 
4,821,550 
2,516,462 
2,231,853 
1,470,49s 
2,147,174 
1,381,625 

694,466 
1,188,044 
2,805,346 
2,420,982 
1,751,394 
1,551,270 
3,106,665 

243,329 
1,066,300 

42,335 
411,588 

1,883,669 
195,310 

7,268,894 

1,893,810 
319,146 

4,157,545 
790,391 
413,536 

6,302,115 
428,556 

1,340,316 
401,570 

2,020,616 

3,048,710 
276,749 
343,641 

1,854,184 
518,103 
958,800 

2,069,042 
92,531 


1910 


2,138,093 

204,354 

1,574,449 

2,377,549 

799,024 

1,114,756 
202,322 
752,619 

2,609,121 

325,594 

5,638,591 

2,700,876 

2,224,771 

1,690,949 

2,289,905 

1,656,388 

742,371 

1,295,346 

3,366,416 

2,810,173 

2,075,708 

1,797,114 

3,293,33s 

376,053 

1,192,214 

81,87s 

430,572 

2,537,167 

327,301 

9,113,614 

2,206,287 

577,056 

4,767,121 

1,657,15s 

672,765 

7,665,111 

542,610 

1,515,400 

583,888 

2,184,789 

3,896,542 

373,351 

355,956 

2,061,612 

1,141,990 

1,221,119 

2,333,860 

145,96s 


Per  cent 
of  increase 
'igoo-io 


16.9 
66.2 
20.0 
60. 1 
48.0 
22.  7 

95 
42.4 

17-7 

101.3 

16.9 

7-3 

03 

ISO 

6.6 

19.9 

6.9 

90 

20.0 

16. 1 

18.S 

15-8 

6.0 

54.  S 
II. 8 

93-4 
4.6 

34-7 
67.6 

25-4 
16.  s 
80.8 
14.7 
109.7 
62.7 
21.6 
26.6 
13- 1 
45-4 
8.1 
27.8 

34-9 
3-6 
II.  2 
120.4 
27.4 
12.8 
57-7 


134      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

TABLE  B 


State 


Alabama 

Arizona 

Arkansas 

California 

Colorado 

Connecticut .  .  . . 

Delaware 

Florida 

Georgia 

Idaho 

Illinois 

Indiana 

Iowa 

Kansas 

Kentucky 

Louisiana 

Maine 

Maryland 

Massachusetts.  . 

Michigan 

Minnesota 

Mississippi 

Missouri 

Montana 

Nebraska 

Nevada 

New  Hampshire. 

New  Jersey 

New  Mexico. .  .  . 

New  York 

North  Carolina. 
North  Dakota.  . 

Ohio 

Oklahoma* 

Oregon 

Pennsylvania .  . . 
Rhode  Island .  .  . 
South  Carolina. . 
South  Dakota. . . 

Tennessee 

Texas 

Utah 

Vermont 

Virginia..  ...... 

Washington .... 

West  Virginia . . . 

Wisconsin 

Wyoming 


White 


igoo 


83 
S6 
S3, 
95 
98 

97 
99 
96 
86 
52 
99 
80 
98 
99 
99 
41 
94 
93 
99 
83 
99 
96 
92 
98 
66 
97 
97 
84 
95 
97 
97 
41 
94 
76 

79 
98 

99 
64 
95 
95 
99 
96 


igio 


97 
99 
96 
88 
56 
99 
82 
98 
99 
99 
43 
95 
95 
99 
90 

99 
96 

93 
98 
68 
98 
97 
87 
97 
97 
98 
44 
96 
78 
82 
98 
99 
67 
97 
94 
99 
96 


Negro 


igoo 


45-2 
i-S 

28.0 
0.7 
1.6 

1-7 
16.6 

43-7 

46.7 

0.2 

1.8 

2-3 

0.6 
3-5 

133 

47.1 
0.2 

19.8 
1. 1 
0.7 
03 

58.5 

5-2 

0.6 
0.6 
03 

O.  2 

3-7 
0.8 

1-4 
330 

O.  I 
2-3 

7.0 
0.3 

2-5 
2.1 

58.4 
O.  I 

23-8 
20.4 

O.  2 
O.  2 

35-6 
0.5 
45 
o.  I 

I.O 


Indian,  Chinese, 
Japanese  and  others 


igio 


42.5 
1.0 

28.1 
0.9 
1.4 
1-4 

15-4 

41.0 

45- 1 
0.2 
1.9 
2.  2 
0.7 
3-2 

II. 4 

43- 1 
o.  2 

17.9 
1. 1 
0.6 

0.3 

56.2 

4.8 

0.5 
0.6 
0.6 

O.  I 

3-5 
0.5 
1-5 
31.6 
o.  I 

2-3 

8.3 

O.  2 

2.5 

1.8 
55-2 

o.  I 
21.  7 
17.7 

03 

0-5 
32.6 

05 
5-3 
o.  I 

1-5 


igoo 


(i) 
22.9 

(i) 
4-8 
0.4 
o.  I 
(i) 

O.  I 

(l) 

4-3 
(i) 
(i) 
(i) 
o.  I 

(i) 

O.  I 
O.  I 

(l) 

O.  I 

0-3 
0.5 

O.  2 
(l) 
6.4 

03 
16.  I 

(l) 
O.  I 
6.9 
O.  2 

03 

2.  2 

(l) 
8.2 

4-3 
o.  I 

O.  I 

(l) 

S-i 
(i) 
(i) 
1-3 
(i) 
(i) 
3-7 
(i) 
0.4 
2.7 


(i)  Less  than  one-tenth  of  1%. 


*  Includes  Indian  Territory  for  igoo. 


STATE  BONDS 
TABLE  C 


135 


State 


Alabama 

Arizona 

Arkansas 

California 

Colorado 

Connecticut .... 

Delaware 

Florida 

Georgia 

Idaho 

Illinois 

Indiana 

Iowa 

Kansas 

Kentucky 

Louisiana 

Maine 

Maryland 

Massachusetts. . 

Michigan 

Minnesota 

Mississippi 

Missouri 

Montana 

Nebraska 

Nevada 

New  Hampshire. 

New  Jersey 

New  Mexico. .  .  . 

New  York 

North  Carolina  . 
North  Dakota.  . 

Ohio 

Oklahoma^ 

Oregon 

Pennsylvania .  . .  , 
Rhode  Island ... 
South  Carohna. . 
South  Dakota. .  . 

Tennessee 

Texas 

Utah 

Vermont 

Virginia 

Washington .... 
West  Virginia. .  . 

Wisconsin 

Wyoming 


Percentage  of 

illiterates  10  years 

and  over 


igoo 


34- o 

29.0 

20.4 

4.8 

4.2 

S-9 
12.0 
21.9 

30.5 
4.6 
4.2 
4.6 

2-3 

2.9 
16. s 

38.  S 

51 
II.  I 

5-9 
4.2 

41 

320 

6.4 

6.1 

2-3 

6.2 

5-9 
33-2 

55 
28.7 

5-6 

4.0 
12. 1 

3Z 
6.1 
8.4 

35-9 
SO 

20.7 

14- 5 
31 
5-8 

22.9 

31 
II. 4 

4-7 
4.0 


igio 


22.9 

20.9 

12.6 

3-7 

3-7 

6.0 

8.1 

13-8 

20.7 

2.2 

3-7 

31 

1-7 

2.2 

12. 1 

29.0 

41 
7.2 
5-2 

3-3 

30 

22.4 

4-3 
4.8 
1.9 
6.7 
4.6 
5-6 

20.  2 
5-S 

18.5 
31 
3- 
5- 


6 
1.9 
5-9 
7-7 

25-7 
2.9 

13.6 
9.9 

2-S 

3-7 

IS- 2 

2.0 

8.3 

3-2 

Z-3 


Class 


Negro 
Indian 
Negro 

Foreign-bom  white 
Foreign-bom  white 
Foreign-bom  white 
Negro 
Negro 
Negro 

Foreign-bom  white 
Foreign-bom  white 
Native  white 
Foreign-bom  white 
Foreign-bom  white 
Native  white 
Negro 

Foreign-bom  white 
Negro 

Foreign-bom  white 
Foreign-bom  white 
Foreign-born  white 
Negro 

Native  white 
Foreign-bom  white 
Foreign-bom  white 
Indian 

Foreign-bom  white 
Foreign-bom  white 
Native  white 
Foreign-bom  white 
Negro 

Foreign-bom  white 
Foreign-bom  white 
Native  white 
Foreign-bom  white 
Foreign-bom  white 
Foreign-bom  white 
Negro 
Indian 
Native  white 
Negro 

Foreign-bom  white 
Foreign-bom  white 
Negro 

Foreign-bom  white 
Native  white 
Foreign-bom  white 
Foreign-bom  white 


Percentage  of 

persons  from 

6  to  20  years 

attending  school 


igio 


Si-4 
S3-4 
S8.7 
65.0 
68.4 

64- S 
60. 9 

S2.7 
Si-9 
69.0 

634 
66.0 
69.6 
70.6 
61.0 

43-1 
67.7 

S8.4 
66.7 
67.7 
68.4 
60.  2 
65.1 
64.7 
69.9 
62.9 
65.8 
62.  2 
61.0 

63- 7 
61.3 
64. 1 
66.1 
67.8 
66.8 
62.3 
61.0 
Si-6 
66.7 
59-4 
s8.o 
70.  2 
70.6 

56.3 
66.5 

6SS 
66.2 

64- 3 


'  Includes  population  of  Indian  Territory  for  1900. 


136     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Another  question  to  be  considered  is  the  intelligence  or  ignorance 
of  the  population.  Table  C  (on  page  135)  shows  the  percentage  of 
Statistics  as  illiterates  of  ten  years  of  age  or  over  for  1900  and 
to  literacy  1910,  the  class  of  population  from  which  a  majority 

of  the  illiterates  is  drawn,  and  the  percentage  of  persons  between 
the  ages  of  six  and  twenty  attending  school  in  1910,^ 

Table  C  shows  the  States  of  Iowa,  Nebraska,  and  Oregon 
with  less  than  2%  of  illiterates  and  the  States  of  South  Dakota, 
Kansas,  Utah,  Idaho,  and  Washington  with  only  between  2% 
and  3%  illiterates,  whereas  it  shows  the  States  of  South  Carolina 
and  Louisiana  with  over  25%  ilHterates  and  the  States  of  Georgia, 
Alabama,  Mississippi,  New  Mexico,  and  Arizona  with  over  20% 
ilHterates.  Table  C  shows  further  that  the  largest  class  of  ilHter- 
ates in  the  States  where  illiteracy  is  greatest,  with  the  exception 
of  New  Mexico  and  Arizona,  is  negro.  The  table  further  shows 
a  school  attendance  of  over  70%  in  the  States  of  Vermont, 
Kansas,  and  Utah  and  of  less  than  60%  in  the  States  of  Mary- 
land, Virginia,  South  Carolina,  Georgia,  Florida,  Alabama,  Ten- 
nessee, Louisiana,  Arkansas,  Texas,  and  Arizona.  All  these  figures 
throw  Hght  on  the  debt  histories  of  many  of  our  States.  It  is  a  fact 
to  be  noted  that  in  every  State  but  Connecticut  and  New  York, 
where  the  illiteracy  is  very  small  anyway,  the  percentage  of  ilHte- 
rates in  1 9 10  is  less  than  in  1900. 

There  remains  in  discussing  state  bonds  only  one  other  broad 
class  of  considerations.  These  are  what  we  will  call  general  con- 
General  con-  siderations  —  such  as  the  size  of  the  State  in  territory, 
ern1ng^safety°^'  ^^^  amount  of  developed  and  undeveloped  resources, 
of  state  bonds  i\^q  location  of  the  State  as  regards  water  and  rail 
facilities,  and  other  similar  considerations.  Any  intelligent  person 
can  arrive  at  a  fairly  sound  conclusion  along  these  Hues  by  observ- 
ing the  geographic  positions  of  the  various  States,  by  looking  up 
the  reports  of  their  manufactures,  by  examining  the  statistics  of 
bank  clearings  and  postal  receipts,  and  by  obtaining  other  general 
information  of  a  similar  character. 

As  iUustrations  of  what  we  mean  by  general  considerations 
Examples  of  favorably  affecting  the  credit  of  States,  we  may 
^^^^  say  that  the  State  of  New  York,  for  instance,  with 

*  Thirteenth  Census,  Population,  vol.  i,  pp.  1108,  1214-18,  1230. 


STATE  BONDS  I37 

its  large  and  fertile  territory  settled  with  an  unusual  number  of 
important  cities,  its  great  harbor  on  the  Atlantic  Ocean  at  New 
York  City,  its  access  to  the  Great  Lakes  and  its  splendid  railroad 
connections  with  the  West,  is  unusually  fortunate;  that  likewise 
the  State  of  IlUnois,  bordering  on  Lake  Michigan  and  located 
almost  in  the  center  of  the  great  Mississippi  watershed,  with  its 
immense  annual  production  of  wealth  from  the  soil,  is  fortunate; 
that  so  is  Texas,  with  an  area  large  enough  and  resources  large 
and  varied  enough  to  enable  it,  perhaps,  to  support  the  entire 
population  of  the  United  States  within  its  borders;  that  likewise 
CaHfornia  is  fortunate,  with  its  great  area,  fine  harbors,  and  ad- 
vantageous position  with  regard  to  the  Panama  Canal. 

Li  summing  up  the  factors  bearing  on  the  credit  of  States,  we 
wish  again  to  lay  emphasis  on  the  following:  (i)  The  proportion 
of  net  debt  to  the  assessed  valuation  and  to  the  true 
value  of  property  and  also  the  proportion  of  the  debt   factors  bearing 
to  the  population;  (2)  the  debt  history  of  the  State  or   °''  '*^*'  "'"'"* 
its  record  of  good  or  bad  faith;  (3)  the  present  constitutional  provi- 
sions regulating  the  creation  and  payment  of  debt;  (4)  the  amount 
and  character  of  the  population;  and  (5)  general  considerations 
bearing  on  the  present  prosperity  and  future  growth  of  the  State. 

On  the  whole,  it  is  probably  fair  to  say  that  to-day  the  legally 
issued  obligations  of  our  best  States  rank  next  in  safety  to  the 
obligations  of  our  National  Government.  The  States,   obligations  of 
broadly  speaking,  have  reserved,  and,  as  far  as  pos-   our  best  states 

M  1         1        1  1  r  .         1       ,  .   ,  ,.       rank  next  in 

sible,  should  reserve,  for  emergencies  the  high  credit  safety  to  ob- 
which  they  have  built  up  through  years  of  successful  the  National 
administration  of  state  finances  and  through  lessons  G°v^^°™^°t 
of  still  earher  years  learned  at  great  cost. 

One  thing  more  remains  to  be  said.  The  prices  of  our  state  bonds 
over  a  long  course  of  years  have  reflected  not  only  the  individual 
credit  of  the  various  States,  but  also,  Hke  all  other 

Prices  of 

bonds,  the  price  of  capital  at  any  given  time.    Li  state  bonds 
1872,  we  find  bonds  of  such  States  as  Rhode  Island,    ^  '^"^912 
Ohio,  and  Michigan  quoted  to  yield  around  6%  net  income,^   Li 
1882,  we  find  bonds  of  Rhode  Island,  New  York  State,  Ohio, 
Michigan,  and  Missouri  selling  to  yield  roughly  between  4%  and 
*  Commercial  and  Financial  Chronicle,  vol.  14,  p.  17. 


138      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

4-5o%-^  During  this  period  the  bonds  of  the  Southern  States  sold 
at  all  kinds  of  prices  —  from  ^  of  i  %  for  South  Carolina  6  per 
cents  in  1878,  1%  for  North  Carolina  special  tax  bonds  in  1879, 
and  1%  for  Arkansas  railroad-aid  7  per  cents  in  1884,  to  117% 
for  Missouri  6  per  cents  in  188 1  and  180%  for  North  Carolina 
railroad  bonds  in  1889  ^  —  the  price  of  any  given  issue  being  based 
upon  whether  interest  was  being  paid  on  the  bonds,  whether  the 
principal  was  questioned,  whether  there  was  a  large  amount  of 
accrued  interest  provided  for  in  some  settlement  and  other  similar 
considerations.  In  1892,  we  find  bonds  of  New  Hampshire  offered 
to  yield  about  3.25%  and  of  Missouri  quoted  to  yield  3.50%.^  In 
1902,  we  find  offerings  of  State  of  Massachusetts  bonds  to  yield 
from  2.95%  to  3.05%,  of  Rhode  Island  bonds  to  yield  about  2.70%, 
of  New  York  State  bonds  to  yield  from  2.55%  to  2.63%,  of  Indiana 
bonds  to  yield  about  3.10%,  of  Tennessee  bonds  to  yield  from 
3.20%  to  3.25%,  and  of  Mississippi  bonds  to  yield  about  3.50%.^ 
Lastly,  in  191 2,  we  find  offerings  of  State  of  Massachusetts  taxable 
bonds  to  yield  from  3.80%  to  3.85%,  State  of  Connecticut  bonds 
to  yield  about  3.82%,  and  State  of  New  York  bonds  to  yield  from 
3.90%  to  3.95%.^  These  quotations  show  some  of  the  fluctuations 
in  the  price  of  capital,  as  well  as  the  credit  at  different  times  of 
some  of  our  States. 

The  great  European  war  has  affected  the  prices  of  state  bonds 
War  prices         Very  slightly.  We  give  below  prices  of  four  issues  of 

of  state  bonds        g^^^^  ^^^^^  ^  j^jy^  ^^^^^  ^^^  ^  j^j^^  ^^^^ .  _ 


July,  igi4  *     July,  igis  f 


Massachusetts  taxable  registered  35  per  centsj 

New  York  State  4  per  cents,  1961 

Virginia  funded  debt  2-3  per  cents,  199 1 

California  4  per  cents  § 


93.82 

ioi|  bid 

83!  bid 

97-31 


92.51 

IOO^-IOl| 

84J  sale 
9731 


•  Commercial  and  Financial  Chronicle,  July  4,  igi4,  p.  32.  t  Ibid.,  July  3,  191S,  p.  34. 

X  Dealers' lists,  July,  1914,  and  July,  1915.  Pricesof  a  twenty -year  3  J%  bond  reduced  from  basis  prices 
(3-95%  and  4-oS%)- 
§  Dealers'  lists,  July.  1914,  and  July,  1915.  Prices  of  twenty-year  4%  bonds  (4.20%  basis). 


'  Commercial  and  Financial  Chronicle,  vol.  34,  p.  24. 

^  See  the  Financial  Review  (Annual,  1915),  pp.  96-97. 

»  Dealers'  lists,  January,  1892.        *  Dealers'  lists,  January,  1902. 

^  Dealers'  lists,  January,  19 12. 


STATE  BONDS 


139 


These  show  changes  during  the  year  so  small  as  to  be  unimpor- 
tant. 

State  bonds,  as  remarked  earlier  in  this  chapter,  as  a  rule  are 
nothing  more  than  promises  to  pay.  These  promises   willingness 
are  not  in  the  last  resort  enforceable  by  suit.    The 
willingness,  therefore,  as  well  as  the  ability,  of  the 
people  of  the  State  to  honor  their  obligations  is  of 
the  first  importance. 


of  the  people 
to  pay  state 
bonds  is  per- 
haps the  most 
important 
factor  in  safety 


CHAPTER  IV 

COUNTY,   MUNICIPAL,   AND  DISTRICT  BONDS 

County  bonds  are  the  direct  obligations  of  counties.  Municipal 
bonds,  strictly  speaking,  are  bonds  of  cities  and  towns  only.    In- 
cluded in  this  term  very  often,  however,  are  bonds 

County,  mum-       .  ,       ,      .  ,  _         '.       .  , 

cipai  and  dis-      issucd  by  school,  park,  drainage,  and  lire  districts  and 

trict  bonds  are  .,  •  .   .      ,  ^.  t        n  ^i         i 

payable  out  Other  quasi-mumcipal  corporations.  In  all  the  above 
of  taxes  cases,  the  bonds  are  payable  out  of  taxes  levied  on  all 

the  property  within  the  county,  municipality,  or  district  issuing 
the  bonds.  ^ 

Furthermore,  a  county,  municipality,  or  district,  unlike  a  State, 
can  be  sued  without  its  own  consent.  In  case  of  failure  to  pay  inter- 
The  means  of  ^^^  ^^  principal,  bondholders  can  bring  suit  asking  for 
recovery  on  de-    a  Icvy  of  taxcs.    In  Certain  States,  such  as  Maine,'^ 

faulted  county,      ^^        :;_.  ,.,■,,  ,  ^         i  ^  .  k 

municipal,  and     Ncw  Hampshire,^  Massachusetts,^  and  Connecticut,** 

are  fajriy^"^  ^      bondholders  have  the  legal  right  to  seize  the  property 

complete  ^j  ^^i  the  inhabitants  in  execution  of  the  judgment  of 

a  court  ordering  payment  of  defaulted  municipal  bonds. 

_  ,     ,  Aside  from  this  question  of  legal  remedy,  the  lead- 

other  factors         .  .         ^  .    .  ,  r  r 

governing  safety   mg  considerations  determining  the  safety  of  county, 

are  similar  to  ..,  it^-j^i         i  'm        j^^i 

those  in  case  of  municipal,  and  district  bonds  are  similar  to  the  con- 
state bonds  siderations  governing  the  safety  of  state  bonds.  In 
other  words,  these  factors  are  of  first  importance:  — 

(i)  The  debt  statement,  or  the  net  debt  compared  with  the 
assessed  valuation  and  with  the  true  value  of  property. 

*  There  is  a  class  of  bonds  known  as  special  assessment  bonds  which  are  payable 
out  of  taxes  levied  on  abutting  property.  These  are  not  in  any  legal  or  true  sense 
municipal  bonds. 

^  Revised  Statutes,  chap.  47,  sec.  96,  and  chap.  86,  sec.  30.  Eames  v.  Savage,  77 
Maine,  212  (1885). 

'  Public  Statutes  of  New  Hampshire,  chap.  234,  sec.  8. 

*  Hawkes  v.  Kennebec  County,  7  Mass.  461,  463  (1811).  Chase  v.  Merrimack 
Bank,  19  Pick.  (Mass.)  564, 569  (1837).  Gaskill  v.  Dudley,  6  Met.  (Mass.)  546  (1843). 
Hill  V.  Boston,  122  Mass.  344,  349  (1877). 

6  Beardsley  v.  Smith,  16  Conn.  368  (1844). 


COUNTY,  MUNICIPAL,  AND  DISTRICT  BONDS         I4I 

(2)  The  constitutional  and  statutory  provisions  in  regard  to  the 
creation  and  payment  of  debt. 

(3)  The  record  of  good  or  bad  faith. 

(4)  The  amount  and  character  of  the  population. 

(5)  The  location,  prosperity,  and  chances  for  growth  of  the 
community. 

As  a  matter  of  law  and  of  practice,  the  proportion  of  net  debt  — 
which  is  usually  taken  to  mean  the  gross  debt  less  the  general  sink- 
ing funds,  the  water  debt,  and  sometimes  debt  created  ^.^^  proportion 
for  income-producing  property  other  than  waterworks   of  net  debt  to 

■^  .  .  .  .  assessed  valu- 

—  to  the  assessed  valuation  vanes  considerably  m  the   ation  varies 
different  States.  If  it  is  safe  to  speak  of  any  definite   i*^n  the  different 
figure  as  the  normal  proportion  of  net  debt  to  assessed     ^^^^^ 
valuation,  we  may  take  possibly  5%.  The  methods  of  figuring  net 
debt  for  municipahties  in  the  different  States  vary  so  much,  how- 
ever, that  this  figure  can  be  considered  nothing  more  than  an  arbi- 
trary standard.  It  is  safe  to  say  that  a  net  debt  (meaning  here  a 
debt  the  real  burden  of  which  is  on  the  taxpayers)  of  1%  of  the 
assessed  valuation  is  small  and  a  net  debt  of  10% 
dangerously  large. ^  ^nkfng-fund 


We  give  below  the  total  debt —  including  debt  for   ten^[argL?^ 
of  the  ten  largest  cities  in  the 


waterworks  and  other  productive  purposes,  but  less   ^jtiesin  the 


sinking-fund  assets 
United  States. ^ 


City 

Debt,  less  sinking- 
fund  assets,  1 91 3 

Debt,  less  sinking-fund 
assets  per  capita 

New  York  City,  New  York 

Philadelphia,  Pennsylvania 

Chicago,  Illinois 

$862,743,861 
100,960,972 
81,699,819 
75,676,830 
46,326,458 
41,829,001 
36,539,920 
28,365,058 
22,854,668 
10,513,076 

$165.95 
61.87 
34-85 
104-75 
80.63 
67.17 
65-51 
63-47 
31.60 
20.19 

Boston,  Massachusetts 

Baltimore,  Maryland 

Cleveland,  Ohio 

Pittsburg,  Pennsylvania 

Buffalo,  New  York 

St.  Louis,  Missouri 

Detroit,  Michigan 

^  For  assessed  valuation  of  counties  and  of  incorporated  places  having  a  popula- 
tion of  2500  and  over,  and  for  net  debts  of  counties  and  of  incorporated  places,  see 
Wealth,  Debt,  and  Taxation,  1913,  vol.  i,  pp.  348,  398,  752,  841. 

2  Ibid.,  pp.  405,  414,  415,  417,  420,  425,  429,  433. 


142     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

This  table  shows  New  York  City  with  by  far  the  largest  per 
capita  debt  and  Detroit  with  by  far  the  smallest. 

Modifying  in  most  States,  to  a  great  extent,  the  significance  of 
the  net  debt  of  any  one  municipal  corporation  is  the  practice  of 
The  significance  issuing  bonds  by  Several  different  corporations  cover- 
of  the  net  debt     jjjg  Substantially  the  same  territory  and  levying  taxes 

of  a  municipahty         "  •'  ^  j  ^         j      o 

often  is  modi-  for  the  payment  of  their  bonds  on  practically  the  same 
tence  of  quasi-  property.  Wc  find  bond  issues!,by  school  districts  in 
SeSing^^ '^^^'^'  over  thirty  States  including  New  Hampshire,  New 
corporations  york,  Illuiois,  Utah,  South  Carolina,  and  Texas;  by 
water  districts  in  Maine  and  Massachusetts;  by  fire  districts  in 
New  Hampshire,  Massachusetts,  Rhode  Island,  and  Connecti- 
cut; by  road  districts  in  Ohio,  Mississippi,  Louisiana,  Arkan- 
sas, and  Texas;  by  park  districts  in  Illinois  and  Missouri;  by 
drainage  districts  in  Illinois,  Wisconsin,  Iowa,  Nebraska,  Okla- 
homa, North  Carolina,  and  Texas;  by  irrigation  districts  in  Mon- 
tana, Colorado,  and  California;  and  by  levee  districts  in  Mississippi, 
Louisiana,  and  Arkansas.^  The  State  of  Missouri  contains,  besides 
the  counties  and  cities,  at  least  four  different  kinds  of  debt-creating 
quasi-municipal  corporations  —  namely,  school,  park,  road,  and 
drainage  districts;  and  the  States  of  Mississippi,  Louisiana,  Ar- 
kansas, and  Texas  contain  four  kinds  —  namely,  school,  road, 
drainage,  and  levee  or  "navigation"  districts.  In  addition  to  the 
above,  we  find  in  Connecticut  especially  and  to  some  extent  in 
New  York  state  bond  issues  by  two  and  sometimes  three  different 
municipal  or  quasi-municipal  corporations  covering  practically  the 
same  territory  and  called  cities,  towns,  boroughs,  and  villages.^ 
A  5%  muni-  ^^  view  of  thesc  facts,  it  is  obvious  that  a  net  debt 

stafe  hS  '°  *     of  5%  for  a  municipality  in  a  State  like  Massachu- 
Massachusetts     setts,  where  the  issue  of  bonds  by  districts  is  com- 

may  be  less  of  .  .     i  r       i         i 

a  burden  on  paratively  rare,  is  less  of  a  burden  on  the  community 

ity  tha^™"°'  than  a  net  debt  say  of  3%  for  a  city  in  some  State 

drbtTa  sute  li^^  Illinois,  where  there  may  be  also  a  2%  or  a  3% 

like  Illinois  d-obt  for  a  drainage  district  covering  practically  the 

'  These  are  simply  examples  and  do  not  include  all  the  States  having  such  dis- 
tricts. 

^  State  and  City  Section  of  the  Commercial  and  Financial  Chrotiide,  May  29, 
1915,  passim.  In  the  State  of  Washington  there  is  a  corporation,  distinct  from  the 
city  of  Seattle,  called  the  Port  of  Seattle,  which  has  issued  bonds.  (See  ibid.,  p.  168.) 


COUNTY,  MUNICIPAL,  AND  DISTRICT  BONDS         I43 

same  territory  as  the  city  and  possibly  a  2%  or  a  3%  debt  issue 
by  park  districts  within  the  city  limits.^ 

Consideration  of  the  proportion  of  debt  to  property  in  our  muni- 
cipalities leads  to  the  question  of  the  constitutional  and  statutory 
provisions  of  the  various  States  in  regard  to  the  issue   constitutional 
of  bonds  by  counties,  municipaUties,  and  districts,   and  statutory 

■^  '  ^ ,  provisions  in 

Perhaps  the  best  way  to  treat  this  phase  of  the  subject   regard  to 
is  to  summarize  and  compare  with  the  laws  of  other 
States  the  recently  enacted  legislation  of  Massachusetts  governing 
municipal  finances. ^ 

The  leading  provisions  of  the  Massachusetts  laws   xhe  Massa- 
goveming  the  creation  of  local  debt  are  as  follows:  —  chusetts  laws 

1.  Except  when  authorized  by  law  for  certain  purposes,  to  be  enumer- 
ated later,  and  except  for  the  purpose  of  paying   j^^j^^.  jj^^^j^. 
certain  demand  notes  or  restoring  trust  funds,  no    for  cities 
city  of  Massachusetts  shall  authorize  indebtedness   ^°   *°^°^ 

to  an  amount  exceeding  2j%  and  no  town  to  an  amount  exceed- 
ing 3%  of  the  average  assessed  valuation  of  taxable  property  for 
the  three  preceding  calendar  years.^  Purposes  of 

2.  Cities  and  towns  may  incur  debt  within  the  limit  of  i^^^e  ^°^  time 
indebtedness  prescribed  above  for  the  following  pur-  gations  within 
poses  and  payable  within  the  periods  stated  below:   ^^^*-  ^^™'*' 

*  In  this  connection  there  is  an  interesting  provision  in  the  constitution  of  South 
Carolina  as  follows:  that  "wherever  there  shall  be  several  political  divisions  or 
municipal  corporations  covering  or  extending  over  the  same  territory  or  portions 
thereof,  possessing  a  power  to  levy  a  tax  or  contract  a  debt,  then  each  of  such  political 
divisions  or  municipal  corporations  shall  so  exercise  its  power  to  increase  its  debt 
under  the  foregoing  eight  per  cent  limitation  that  the  aggregate  debt  over  and  upon 
any  territory  of  this  State  shall  never  exceed  fifteen  percentum  of  the  value  of  all 
taxable  property  in  such  territory  as  valued  for  taxation  by  the  State:  Provided  that 
nothing  herein  shall  prevent  the  issue  of  bonds  for  the  purpose  of  paying  or  refunding 
any  valid  mimicipal  debt  heretofore  contracted  in  excess  of  eight  percentum  of  the 
assessed  value  of  all  the  taxable  property  therein."  {Constitution  of  South  Carolina, 
art.  X,  sec.  5.) 

2  Acts  1913,  chap.  719,  as  amended  by  Acts  1914,  chaps.  143  and  317;  Acts  1913, 
chap.  648;  Acts  1913,  chap.  634;  Acts  1913,  chap.  (>Tj;Acts  1913,  chap.  727,  as  amended 
by  Acts  1914,  chap.  55;  Acts  1910,  chap.  616,  as  amended  by  Acts  1912,  chaps.  45 
and  49;  Acts  1913,  chap.  416;  Acts  1909,  chap.  490,  part  i,  sec.  5,  cl.  15,  as  amended 
by  Acts  1914,  chap.  83;  Ads  1910,  chap.  379. 

*  Acts  1913,  chap.  719,  sec.  12;  Acts  1913,  chap.  634. 

Counties  in  Massachusetts,  except  Suffolk  and  Nantucket,  cannot  borrow,  except 
in  anticipation  of  taxes,  without  special  permission  of  the  Legislature.  (Revised  Laws, 
chap.  21,  sec.  39,  as  amended  by  Acts  1914,  chap.  386.)  Fire,  water  and  watch  dis- 
tricts are  similarly  limited.  {Acts  1913,  chap.  719,  sec.  3.) 


144     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

(i)  For  the  construction  of  sewers  for  sanitary  and  surface 
Sewers        drainage  purposes  and  for  sewage  disposal,  thirty  years. 

(2)  For  acquiring  land  for  public  parks  under  the  provisions  of 
Parks          chapter  28  of  the  Revised  Laws  and  amendments  thereof, 

thirty  years. 

(3)  For  acquiring  land  for,  and  the  construction  of,  schoolhouses 
School-        or  buildings  to  be  used  for  any  municipal  or  departmental 
houses         purpose,  including  the  cost  of  original  equipment  and  fur- 
nishing, twenty  years. 

(4)  For  the  construction  of  additions  to  schoolhouses  or  buildings 
to  be  used  for  any  municipal  purpose,  including  the  cost  of 

Additions  to  original  equipment   and  furnishings,  where  such  additions 
buildings     increase  the  floor  space  of  said  buildings  to  which  such  ad- 
ditions are  made,  twenty  years. 

(5)  For  the  construction  of  bridges  of  stone  or  concrete,  or  of 
Bridges       iron  superstructure,  twenty  years. 

(6)  For  the  original  construction  of  streets  or  highways  or  the 
Streets        extension  or  widening  of  streets  or  highways,  including  land 

damages  and  the  cost  of  pavement  and  sidewalks  laid  at  the 

time  of  said  construction,  ten  years. 

^^'"    .  (7)  For  the  construction  of  stone,  block,  brick,  or  other  per- 
manent ^'^  ...,,.,  '^ 
pavements   manent  pavement  01  similar  lasting  character,  ten  years. 

(8)  For  macadam  pavement  or  other  road  material  under  specifi- 

Temporary  cations  approved  by  the  Massachusetts  Highway  Commis- 

pavements    gion,  five  years. 

w^^^^    (9)  For  the  construction  of  walls  or  dikes  for  the  protection  of 

dikes  highways  or  property,  ten  years. 

(10)  For   the   purchase    of    land   for    cemetery   purposes,   ten 

Cemeteries    years. 

(11)  For  such  part  of  the  cost  of  additional  departmental  equip- 
Depart-  ment  as  is  in  excess  of  25  cents  per  $1000  of  the  preceding 
equipment    year's  valuation,  five  years. 

(12)  For  the  construction  of  sidewalks  of  brick,  stone,  concrete, 
Sidewalks     or  Other  material  of  similar  lasting  character,  five  years. 

(13)  For  connecting  dwellings  or  other  buildings  with  public  sewers, 

Connection  when  a  portion  of  the  cost  is  to  be  assessed  on  the  abutting  pro- 
with  sewers  „     -  r 

perty  owners,  five  years. 

Abatement   (14)  For  the  abatement  of  nuisances  in  order  to  conserve 

of  nuisances  ,i  ■,■,•     ■,       ■,,■,      r 

the  public  health,  five  years. 
(15)  For    extreme     emergency     appropriations     involving     the 
Emergency  health  or  safety    of    the  people    or    their    property,   five 

appropna-  ,  -^  ft-  t-     t-       j? 

tions  years.  ^ 

^  Acts  1913,  chap.  719,  sec.  s,  as  amended  by  Acts  igi4,  chap.  317. 


COUNTY,  MUNICIPAL,  AND  DISTRICT  BONDS         145 

3.  Debts  may  be  authorized  as  above  only  by  a  two-thirds  vote  of  all 
the  members  of  a  city  council  or  other  governing  body  taken  by 
yeas  and  nays  and  subject  to  the  approval  of  the   ^^^  ^^, 
mayor,  if  such  approval  is  required  by  the  charter  of   vote  is 

the  city;  and  in  the  cases  of  towns  only  by  a  vote   ^^^*^^^^^ 
of  two  thirds  of  the  voters  present  and  voting.^ 

4.  Cities  and  towns  may  incur  debt  outside  the  limit  of  indebtedness 
prescribed  above  for  the  following  purposes  and  pay-   Debt  outside 
able  within  the  periods  stated  below:  —  ^™'^ 

(i)  For  temporary  loans  in  anticipation  of  revenue,  or  in  antici- 
pation of  the  issue  of  bonds  or  notes,  or  in  connection  with 
altering  grade  crossings,  or  in  connection  with   Temporary 
highway  construction  in  anticipation  of  reim-   '^^^^ 
bursement  by  the  Commonwealth,  one  year. 

(2)  For  establishing  or  purchasing  a  system  for  supplying  the 
inhabitants  of  a  city  or  town  with  water,  or  for  the  pur- 
chase of  land  for  the  protection  of  a  water  sys-    „, 

.  r  •  ■  ^        •  ^  ^     ^^  •  ^  Water  works 

tem,  or  tor  acquirmg  water  rights,  thirty  years. 

(3)  For  the  extension  of  water   mains   and  for   water  equip- 
water  departmental  equipment,  five  years.         ^^^^ 

(4)  For  establishing,  purchasing,  extending  or  enlarging  a  gas  or 
electric  lighting  plant  within  the  limits  of  a  city  or  town 
twenty  years;   but   the  indebtedness  so  in-    Electric 
curred  shall  be  limited  to  an  amount  not  ex-   *'s^t  plants 
ceeding  in  a  town  5%  and  in  a  city  2^%  of  the  last  pre- 
ceding assessed  valuation  of  such  town  or  city. 

(5)  For  acquiring  land  for  the  purposes  of  a  public  playground, 
as  specified  in  section  19  of  chapter  28  of  the  Revised  Laws 
and  amendments  thereof,  thirty  years;  but  the 
indebtedness  so  incurred  shall  be  limited  to      ^ys'"°"°  ^ 
an  amount  not  exceeding  one  half  of  1%  of  the  last  preced- 
ing assessed  valuation  of  the  city  or  town.^ 

5.  All  other  debts  hereafter  incurred  by  a  city  or  town  shall  be  reck- 
oned in  determining  its  limit  of  indebtedness,  and  debts  authorized 
under  the  provisions  just  stated,  except  for  tempo-   y^j^g  ^^^^^_ 
rary  loans,  must  be  authorized  by  the  same  votes  as   sary  outside 

in  the  case  of  debts  within  the  debt  limit.  Temporary   ^^^*  ^°^'' 
loans,  unless  in  anticipation  of  the  proceeds  of  bonds  or  notes 
(which  require  no  vote  at  all),  require  a  majority   Certificates 

VOte.^  except  for 

6.  Cities  and  towns  may  sell  bonds,  notes,  or  certifi-   lo^rmi^t  be 
cates  of  indebtedness  as  authorized  above  at  not   ^°'^  ^^  p^"" 

^  Acts  igij,  chap.  719,  sec.  5. 

'  Acts  igij,  chap.  719,  sec.  6.  See  also  sections  2,  3,  4,  and  9.        ^  Ibid. 


146      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

less  than  par  at  public  or  private  sale.  Temporary  loans,  as  de- 
scribed above,  to  run  not  over  one  year  may  be  sold  at  a  dis- 
count.^ 

7.  No  further  sinking  funds  for  the  payment  of  debts  created  by 
Payment  of  cities  and  towns  shall  be  established,  and  all  loans,  except 
method  is^"^^  temporary  loans  to  run  not  over  one  year,  shall  be  payable 
compulsory         in  annual  installments  sufficient  to  extinguish  at  maturity 

the  debt  created.^ 

8.  The  city  of  Boston  shall  not  assess  for  ordinary  municipal  purposes 
over  $10.55  on  every  $1000  of  taxable  property,  according  to  the 

Tax  limits  for      average  assessed  valuation  for  the  preceding  three  years.^ 

municipal  Other  cities  in  Massachusetts  may,  after  a  public  hearing, 

purposes  establish  by  ordinance  the  maximum  rate  of  taxes  to  be 

raised  for  ordinary  municipal  purposes,  that  is,  for  purposes  exclu- 

'     sive  of  the  state  tax  and  other  amounts  assessed  upon  the  city  by 

the  State,  the  county  tax  and  sums  required  by  law  to  be  raised  on 

account  of  the  city  debt.   Such  maximum  rate  can  be  thereafter 

changed  only  by  a  two-thirds  vote  of  the  governing  body,  after  a 

public  hearing.'* 

9.  During  the  year  1914  every  city  and  town  which  has  at  the  time  of 
this  act  (1913)  outstanding  notes  payable  on  demand,  or  which  has 

Payment  of  expended  for  the  general  expenses  of  the  city  or  town 
anTrestoradon  trust  funds  which  have  not  been  restored,  shall  provide 
of  trust  funds  for  the  payment  of  such  notes  and  for  the  restoration  of 
such  trust  funds  in  the  tax  levy  for  the  year  19 14  where  such  provi- 
sion is  reasonably  practicable.  When  not  practicable,  debt  may  be 
incurred,  outside  the  limit  of  indebtedness  fixed  by  law,  to  the 
amount  necessary  to  pay  the  demand  notes  or  restore  the  trust 
funds,  and  serial  bonds  or  notes  may  be  issued  payable  at  periods 
not  later  than  fifteen  years  from  their  respective  dates  of  issue.  ^ 

A  brief  discussion  of  the  propriety  and  wisdom  of  the  above  laws 
,     and  a  comparison  with  the  laws  of  other  States  may 

Comparison  of  .  '^  ,      .  •' 

Massachusetts     bc  of  interest.  The  variations  are  almost  numberless, 
those  of  but  certain  general  resemblances  and  differences  may 

other  states  be  pointed  OUt. 

The  first  thing  to  fix  in  mind  is  the  position  of  the  legislature. 
As  a  rule,  its  action  is  limited  by  constitutional  restrictions.  In 
some    States,  however,   such    as  New  Hampshire,^   Massachu- 

^  Ads  1913,  chap.  719,  sees.  8  and  10.  "^  Ibid.,  sees.  13  and  14. 

'  Ibid.,  sec.  18.  *  Ibid.,  sec.  19.  ^  Ibid.,  chap.  634. 

8  Abbott,  Laws  of  Public  Securities,  sec.  495,  p.  992. 


COUNTY,  MUNICIPAL,  AND  DISTRICT  BONDS         I47 

setts/  and  Kansas,^  the  limitation 'of  the  creation  of  debts  by 
counties,  municipalities,  and  other  political  subdi-   Authority  and 
visions  is  left  to  the  state  legislature  without  sub-   Legi'sktire^fn 
stantial  constitutional  restrictions.   Sometimes  the   certain  states 
legislature  in  municipal  charters  lays  down  certain  limits  for  the 
creation  of  debt;^  sometimes  it  passes  more  or  less  general  leg- 
islation;  and  sometimes  it  authorizes  by  special  acts  specific 
loans. 

The  limitation  of  the  debt  of  cities  in  Massachusetts  to  2^%  and 
of  the  debt  of  towns  to  3%  of  the  average  assessed  valuation  for  the 
three  preceding  years,  except  for  temporary  loans  and 
except  for  the  acquisition  of  property  which  should   indebtedness  in 

,  ,r  .  •  r  1T1  1  1         Other  States 

be  self-supportmg  or  for  public  playgrounds,  may  be 
said  to  be  very  conservative.  This  compares  with  a  gross  debt 
limit,  with  certain  exceptions,  of  10%  in  New  York  State;  ^  a  gross 
debt  limit  of  2%  of  the  value  of  taxable  property,  except  obliga- 
tions incurred  for  public  protection  or  defense  and  except  gravel 
road  bonds,  in  Indiana;^  a  Hmit  for  municipalities  in  Wisconsin^ 
of  5  %  of  the  value  of  taxable  property ;  a  limit,  with  certain  excep- 
tions, for  cities  and  towns  in  Virginia  ^  of  18%  of  the  assessed  value 
of  real  estate  unless  further  issue  is  authorized  by  a  majority  vote 
of  the  people ;  and  in  Louisiana,^  a  Hmit  for  municipalities,  parishes, 
and  districts,  with  certain  exceptions,  of  10%  of  the  assessed  value 
of  the  property. 

A  practice  has  crept  into  the  constitutional  provisions  or  laws  of 
some  of  the  States  making  special  exceptions  in  favor  of  certain 

*  Abbott,  Laws  of  Public  Securities,  sec.  487,  p.  978. 
'    2  Constitution  of  Kansas,  art.  xii,  sec.  5. 

*  State  and  City  Section  of  the  Commercial  and  Financial  Chronicle,  May  30, 
1914,  pp.  32  and  58. 

*  Constitution  of  New  York,  art.  vin,  sec.  10,  as  amended  November,  1909,  in  effect 
January  i,  1910.   Birdseye,  Consolidated  Laws  of  New  York,  vol.  7,  p.  22. 

^  Constitution  of  Indiana,  art.  xm.  Bums's  Annotated  Indiana  Statutes  (Revision 
of  1914),  vol.  I,  p.  124. 

^  Constitution  of  Wisconsin,  art.  xi,  sec.  3.  See  Wisconsin  Statutes  (1898),  vol.  i, 
p.  122. 

^  Constitidion  of  Virginia,  art.  vm,  sec.  127.  Pollard,  Code  of  Virginia  (1904), 
p.  ccxlii. 

*  Constitidion  of  Louisiana  (1913),  art.  281,  as  amended  November  3,  1914.  See 
Acts  of  Louisiana  (1914),  no.  192,  for  amendment.  Drainage  districts,  under  the 
above  article,  are  given  powers  relative  to  incurring  indebtedness  up  to  fifty  cents 
per  acre,  to  be  secured  by  special  taxes  of  like  amount. 


148      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

communities,  so  as  to  allow  them  to  issue  bonds  beyond  the 
amount  authorized  for  other  communities  in  the  same 

Exceptions  m 

favor  of  certain  State.  Examples  of  a  reasonable  use  of  this  practice 
are  New  York  ^  and  Philadelphia  ^  for  expensive  per- 
manent improvements,  such  as  subways  and  docks.  Examples  of 
what  seem  to  us  illogical  and  possibly  dangerous  exceptions  are 
those  found  in  the  laws  of  South  Carolina  '  and  Alabama.^  In 
South  Carolina,  especially,  the  habit  has  grown  up  of  excepting 
municipalities  from  the  debt  limit  for  almost  any  purpose. 

In  this  connection  it  is  to  be  noted  that  Massachusetts  in  its 
recently  enacted  legislation,  while  carefully  limiting  the  creation  of 
Limiting  debt  debt,  has  rcmovcd  the  tax  limit  for  municipalities,  ex- 
toHmThl"^  cept  in  Boston,  in  all  municipalities  in  the  State.  This 
Massachusetts  sccms  to  US  wisc.  Removing  the  tax  hmit  and  care- 
fully limiting  the  creation  of  debt  certainly  is  more  conservative 
than  hmiting  the  tax  rate  and  allowing  more  or  less  liberal  borrow- 
ing. A  rise  in  taxes  is  noticed  sooner  and  felt  more  directly  by  citi- 
zens than  is  an  increase  in  the  debt.  Tying  any  community  down 
too  tight  in  both  respects  may  hamper  its  reasonable  development 
and  in  the  long  run  make  its  bonds  less  safe.^ 

All  the  purposes  for  which  municipalities  in  Massachusetts  may 

issue  bonds,  it  will  be  noted,  are  of  a  strictly  public  character  and 

not  for  the  special  benefit  of  any  private  individual 

Purposes  of  ^  ^  . 

issue  should        or  Corporation.    Throughout  the  United  States  the 

be  of  a  strictly  .  i  •   1  ,  •    •      i 

public  most  common  purposes  for  which  county,  municipal, 

c  aracter  ^^^  district  bonds  may  be  issued  are  as  follows: 

Roads,  bridges,  and  county  buildings,  such  as  court-houses  and 
jails;  parks  and  playgrounds,  sewers,  waterworks,  and  electric 

1  Constitution  of  New  York,  art.  vm,  sec.  10,  as  amended  1909.  Birdseye,  Con- 
solidated Laws  of  New  York,  vol.  7;  cumulative  Supplement  (1910-13),  vol.  i,  p. 
22. 

^  Constitution  of  Pennsylvania,  art.  DC,  sec.  8,  as  amended  191 1.  Purdon's  Digest 
(13th  ed.),  supplement  of  1912,  p.  2. 

^  Constitution  of  South  Carolina  (1895),  art.  X,  sec.  6,  as  amended  191 1.  See  also 
ibid.,  art.  vin,  sec.  7.  See  Code  of  Laws  of  South  Carolina  (1912),  vol.  11,  pp.  632, 
642,  660. 

*  Constitution  of  Alabama  (1901),  art.  xn,  sec.  226.  Code  of  Alabama  (1907; 
Criminal),  vol.  3,  p.  173. 

^  For  difficulties  likely  to  arise  in  bonds  payable  out  of  taxes  limited  to  a  certain 
amount,  see  United  States  v.  County  of  Clark,  96  U.S.  211,  and  State  ex  rcl.  Hudson 
V.  Trammel,  106  Mo.  510;  17  S.W.  502. 


COUNTY,  MUNICIPAL,  AND  DISTRICT  BONDS         1 49 

lighting  plants  ^  and  municipal  buildings,  such  as  school-buildings, 
city  or  town  halls,  and  fire  stations. 

As  examples  of  authority  given  municipalities  outside  of  Massa- 
chusetts to  issue  bonds  for  improper  or  unwise  purposes,  mention 
may  be  made  of  the  following:  Permission  for  towns   Examples  of 
in  Vermont  2  to  borrow  for  the  benefit  of  railroads  to   fsTuSond? 
an  amount  not  exceeding  practically  8%  of  the  as-   for  improper 
sessed  valuation;  permission  for  counties  and  munici-   purposes 
palities  in  Minnesota  ^  to  create  debts  in  aid  of  railroads  to  an 
amount  not  exceeding  5%  of  the  taxable  property  of  the  munici- 
paHty ;  permission  for  municipalities  in  Nebraska  ^  to  make  dona- 
tions to  a  railroad  or  for  other  works  of  internal  improvement  to  an 
amount  not  exceeding  10%  of  the  aggregate  assessed  valuation  of 
the  county  and  subdivisions,  provided  the  proposition  shall  have 
been  approved  by  the  voters,  with  permission  for  an  additional 
amount  of  5%  by  a  two-thirds  vote;  and  permission  for  certain 
townships  in  South  Carolina  ^  to  issue  railroad-aid  bonds  to  an 
amount  not  exceeding  8%  of  the  assessed  valuation. 

In  a  large  number  of  the  States,  issuing  bonds  in  aid  of  railroads 
or  for  private  enterprises,  purchasing  the  stock  of  private  corpora- 
tions, or  loaning  the  credit  of  the  county  or  municipal- 
ity to  such  corporations  specifically  is  forbidden.^   loaning  credit 
This  prohibition  is  the  result  of  the  experience  which   munidpa^fties 
many  counties  and  some  municipalities  have  had,  in   '^  forbidden 

^  Two  interesting  provisions  among  the  laws  of  many  States  authorizing  munici- 
palities to  borrow  for  the  purchase  of  public  utilities  are :  those  in  the  laws  of  Michigan 
authorizing  villages  to  issue  mortgage  bonds  to  acquire  public  utilities  without  liability 
on  the  part  of  the  village;  and  those  in  the  laws  of  Mississippi  providing  that  bonds 
issued  for  waterworks,  gas  or  electric  lighting  plants  may  be  secured  by  pledge  of 
the  revenue  of  such  plants.  {Public  Acts  of  Michigan  [1909],  chap.  278,  sec.  26.  See 
Howell's  Michigan  Statutes  [2d  ed.],  vol.  3,  title  xvi,  chap.  98,  sec.  6215.  Laws  of 
Mississippi  [1914],  chap.  147,  sec.  6.) 

^  Public  Statutes  of  Vermont  (1906),  sec.  3558. 

*  General  Statutes  of  Minnesota  (1913),  sees.  1928  and  1951.  See  also  Constitution 
of  Minnesota,  art.  rx,  sec.  15. 

*  Constitution  of  Nebraska,  art.  xn,  sec.  2.  See  also  Revised  Statutes  of  Nebraska 
(1913),  sec.  405. 

*  Constitution  of  South  Carolina,  art.  x,  sec.  6.  Code  of  Laws  of  South  Carolina 
(1912),  vol.  2,  p.  642 .    See  also  Acts  of  South  Carolina  (1911),  nos.  155,  156,  159,  162. 

^  Constitution  of  New  Hampshire,  part  2,  art.  v.  Public  Statutes  of  New  Hampshire 
(1901),  p.  33.  Connecticut:  Amendments  to  the  Constitution,  art.  xxv.  Constitution  of 
New  York,  art.  vin,  sec.  10.  Birdseye,  Co7isolidated  Laws  of  New  York,  p.  150. 
Constitution  of  Illinois,  art.  xiv,  separate  section;  Revised  Statutes  of  Illinois  (1912), 
p.  Ixxv. 


I50     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

issuing  bonds  in  aid  of  private  enterprises,  particularly  railroads, 
of  finding  later  that  the  communities  did  not  get  the  benefits  which 
they  expected  and  of  being  obUged  or  being  willing  to  default  on 
the  bonds.  The  experience  of  counties  and  municipalities  in  this 
respect  has  been  similar  to  the  experience  of  many  of  our  States. 

Certain  States  permit  municipalities  to  issue  refunding  bonds  — 
a  practice  which  should  not,  except  under  special  circumstances, 
Refunding  ^^  permitted.  Among  such  States  may  be  mentioned 

bonds  Vermont,^  Rhode  Island, ^  Virginia,^  and  Alabama.^ 

In  the  Massachusetts  laws,  the  length  of  time  which  bonds  may 
run  is  based,  as  far  as  practicable,  on  the  permanence  of  the  work 
,  ,,       ,         for  which  the  money  is  spent.  For  instance,  bonds  is- 

In  Massachu-  -^  ^ 

setts  time  to  sucd  f or  the  purchasc  of  land  for  parks  or  playgrounds 
withperma-  givc  the  city  a  permanent  assct.  Bonds  issued  even  for 
nence  of  work  school-buildings  alouc  givc  the  city  property  with  a 
life  probably  of  at  least  twenty  years;  whereas  bonds  issued  for 
sidewalks  may  give  the  municipaHty  property  which  will  have  to 
be  replaced  or  rebuilt  within  a  short  time.  The  limitation  to  ten 
years  of  bonds  issued  for  cemetery  purposes  is  based  probably  on 
the  minimum  estimate  of  the  length  of  time  the  land  will  be  avail- 
able for  cemetery  purposes. 

In  the  constitutions  or  statutes  of  many  of  the  States,  an  arbi- 
in  some  States  trary  Hmit  is  placed  on  counties,  cities,  and  other  po- 
the  length  of       Htical  subdivisious  as  to  the  length  of  time  which  their 

time  bonds  may  .  ° 

run  is  fixed  bouds  may  run.  For  mstance,  bonds  in  Colorado^ 
to  the  purpose  must  ruu  not  less  than  ten  years  and  not  more  than 
o  issue  fifteen  years;  bonds  in  New  Hampshire^  and  in  Illinois' 

^  Public  Statutes  of  Vermont  (1906),  chap.  157,  sees.  3567,  3572. 

"  General  Laws  of  Rhode  Island  (1909),  title  vm,  chap.  46,  sec.  21.   (Towns  only.) 

'  Acts  igo8,  p.  535.  Pollard's  Virginia  Code,  Annotated,  vol.  3  (Supplement,  1910), 
sec.  1038  /,  p.  133.  See  also  Acts  1914,  p.  256.  Pollard's  Code  Biennial  (Virginia, 
1914),  sec.  834  b,  p.  142. 

^  Constitution  oj  Alabama  (1901),  sec.  224.  See  aXso  Acts  of  Alabama  (1907),  p.  790, 
sec.  195.    Political  Code  of  Alabama  (1907),  art.  xxvm,  sec.  1436. 

*  Constitution  of  Colorado,  art.  xi,  sec.  8.  Mills's  Annotated  Statutes  of  Colorado, 
p.  c  207.  See  also  ibid.,  chap.  161,  sec.  7226,  sub-section  6,  p.  3028. 

*  Municipal  Bonding  Act,  Laws  of  New  Hampshire  (1895),  chap.  43,  sec.  2. 
Public  Statutes  of  New  Hampshire  (1901),  p.  491. 

'  Constitution  of  Illinois,  art.  ix,  sec.  12.  Revised  Statutes  of  Illinois  (191 2),  p, 
Ixix.  See  also  Revised  Statutes  of  Illinois  (1912),  sec.  700,  p.  455;  chap.  34,  sec.  128, 
P-  657. 


COUNTY,  MUNICIPAL,  AND  DISTRICT  BONDS         151 

must  be  paid  within  twenty  years;  in  Oklahoma,  ^  within  twenty- 
five  years;  in  Pennsylvania, ^  within  thirty  years;  inTexas,^  within 
forty  years,  and  in  CaUfornia,^  with  certain  exceptions,  within 
forty  years. 

In  many  States  it  is  necessary  to  have  all  or  practically  all  bond 
issues  of  local  communities,  beyond  a  certain  amount,  authorized 
by  a  vote  of  the  people ;  for  instance,  in  Pennsylvania,^   j^  ^^^ 
a  majority  vote  is  necessary;  in  South  Carolina,^  a   states  a  vote 
majority  of  voters  who  have  paid  taxes  for  the  previ-   necessary  to 
ous  year;  in  Utah,^  a  majority  vote  of  the  property 
taxpayers;  in  Vermont,^  Kentucky,^  Missouri,^"  North  Dakota," 
and  certain  other  States,  a  two-thirds  vote  of  the  people;  and  in 
Oklahoma  ^^  and  Washington, ^^  a  three-fifths  vote  of  the  people. 
Provisions  of  many  other  States  along  these  fines  could  be  given. 

We  have  discussed  above  the  Massachusetts  laws  in  regard  to 
the  creation  of  local  debt,  and  have  compared  them  with  the  laws 
of  some  of  the  other  States.  The  creation  of  debt  is  Methods  of 
one  thing  and  the  payment  of  it  is  another.  The  paying  debt 
Massachusetts  laws  ^*  compel  payment  by  serial  method.  The  com- 
monest method  still,  however,  in  other  States  is  payment  through 
the  establishment  of  sinking  funds,  created  out  of  annual  taxes  and 
calculated  to  be  sufficient  with  accumulations  to  pay  the  principal 
of  the  debt  at  maturity.  Payment  by  serial  method  is  simpler, 
more  scientific,  and  probably  more  economical. 

^  Constitution  of  Oklahoma,  art.  x,  sec.  26. 

*  Constitution  of  Pennsylvania,  art.  rx,  sec.  10.  Purdon's  Digest  (13th  ed.),  vol.  i, 
p.  199.  See  Act  of  April  20,  1874,  sec.  i,  Laws  of  Pennsylvania,  p.  65.  Purdon's 
Digest  (13th  ed.),  vol.  3,  p.  2721. 

*  Revised  Civil  Statutes  of  Texas  (1911),  title  xvni,  art.  618. 

*  Constitution  of  California,  art.  xi,  sec.  18.  Henning's  General  Laws  of  California 
(1914),  p.  79;  ibid.,  vol.  5,  chap.  352,  art.  3051,  sec.  5. 

^  Constitution  of  Pennsylvania,  art.  rx,  sec.  8.  Purdon's  Digest  (13th  ed.),  vol.  i, 
p.  197. 

'  Constitution  of  South  Carolina,  art.  n,  sec.  13.  See  also  art.  8,  sees.  5  and  7. 
^  Constitution  of  Utah,  art.  xrv,  sec.  3. 

*  Public  Statutes  of  Vermont  (1906),  chap.  157,  sec.  3556. 
'  Constitution  of  Kentucky,  sec.  157. 

^^  Constitution  of  Missouri,  art.  x,  sees.  12  and  12 A.  Revised  Statutes  of  Missouri, 
(1909),  chap.  84,  art.  2,  sec.  8668. 

"  Constitution  of  North  Dakota,  art.  xn,  sec.  183.  Compiled  Laws  of  North  Dakota 
(i9i3)>  P-  ciii. 

^^  Constitution  of  Oklahoma,  art.  x,  sec.  26. 

^'  Constitution  of  Washington,  art.  vm,  sec.  6.         "  Acts  1913,  chap.  719,  sec.  14. 


152      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

On  the  whole,  the  Massachusetts  laws,  in  our  opinion,  establish 
a  system  of  creating  and  paying  debt  that  seems  financially  sound 
Local  debt  and  poUtically  expedient.^  They  cover  in  a  systematic 

laws  in  way  all  the  proper  purposes  for  creating  debt;  and 

on  the  whole,  '  they  providc  a  safety-valve  for  the  public  demand  for 
^°°  improvements  through  the  removal  of  the  state  limit 

on  the  local  tax. 

In  general,  it  may  be  said  that  constitutional  or  statutory  provi- 
sions in  regard  to  the  creation  of  local  debt  which  are  too  strict  or 
General  laws  ^^^  narrow  are  undesirable.  They  are  likely  to  lead 
1°  '^l^d'^h  ^°  ^^  ^  ^^^^  ^^^^  ^^  exceptions  and  special  acts  ^  which,  in 
should  not  the  end,  will  take  much  of  the  effectiveness  out  of  the 

limitation  of  debt.  The  provisions  of  many  States  in 
regard  to  debt  creation  by  municipalities  seem  extremely  conserva- 
tive when  you  begin  to  read  and  extremely  lax  before  you  finish. 

Taken  by  and  large  throughout  the  country,  the  state  limita- 
tions on  the  creation  of  local  debts  are  much  more  liberal  than  the 
Laws  govern-  provisious  govcming  the  creation  of  state  debt.  This 
more°iiberai '      is,  in  our  Opinion,  desirable.  The  credit  of  the  State 

than  those  should  be  rcscrved  largely  for  emergencies.  Further- 

governing  O    J  o 

state  debt  more,  the  citizens  of  a  city  or  town  are  better  able  to 

judge  of  the  desirability  of  any  given  loan  by  the  municipality  than 
they  are  of  a  state  loan.  In  the  case  of  a  municipal  loan,  the  citizens 
get  the  direct  benefit  and  they  carry  the  immediate  burden. 
Other  factors  Pcrhaps  cvcu  more  important  than  the  constitu- 

the^saffty'^of'  tional  and  statutory  provisions  regulating  the  crea- 
county,  ^Jqj^  qj^^  payment  of  local  debt  are  the  following  con- 

mumcipal  and  '^   •'  ° 

district  bonds     sidcrations: 

(i)  The  amount  and  character  of  the  population. 

(2)  The  record  of  good  or  bad  faith. 

(3)  The  location,  prosperity  and  probable  future  growth  of  the 
community. 

The  amount  of  the  population  of  a  county  or  city  is  an  important 
consideration.   There  are  just  fifty  cities,  according  to  the  census 

^  In  the  matter  of  public  credit,  all  considerations  having  a  bearing  on  the  general 
status  and  well-being  of  the  community  are  relevant. 

'^  Some  people  have  criticized  even  the  new  Massachusetts  laws  in  this  respect. 
The  right  to  go  to  the  legislature  for  special  acts  is  not,  of  course,  taken  away, 
although  the  inducement  to  do  so  is  less  than  imder  the  old  laws. 


COUNTY,  MUNICIPAL,   AND  DISTRICT  BONDS         1 53 

of  1910,  with  a  population  of  100,000  or  over.   New  York  City  is 
the  largest  and  Albany  the  smallest  of   these  fifty   The  amount 
cities.   The  ten  largest  cities  of  the  United  States   tio^fs""^'"'^" 
with  their  population  are:  "•  important 

New  York,  New  York 4,766,883 

Chicago,  Illinois 2,185,283 

Philadelphia,  Pennsylvania 1,549,008 

St.  Louis,  Missouri 687,029 

Boston,  Massachusetts 686,092 

Cleveland,  Ohio 560,663 

Baltimore,  Maryland 558,485 

Pittsburg,  Pennsylvania 533 ^905 

Detroit,  Michigan 465,776 

Buffalo,  New  York 423,715 

The  direct  obligations  of  the  above  cities,  payable  out  of  taxes 
levied  on  all  the  property  within  those  cities,  may  be  considered,  in 
a  general  way,  the  leading  municipal  securities  in  the  United  States. 
If  we  should  take  a  limit  of  50,000  people  or  over,  we  should  find  a 
long  list  of  cities  with  high  credit. 

More  important  even  than  the  size  of  the  population  in  its  effect 
on  the  real  safety  of  municipal  bonds  is  the  character  of  the  popu- 
lation. In  the  last  resort,  all  debts  of  any  kind  depend   The  character 
on  the  good  faith  of  some  person  or  persons  to  do  as   il^^^  f°^^' 
they  have  agreed  and  to  honor  their  obligations.  The   important 
character  of  the  people  of  the  New  England  States,  from  the  point 
of  view  of  paying  their  debts,  is  perhaps  better  than  that  of  any 
other  section  of  the  country.  The  people  of  New  York  State  like- 
wise have  been  careful  about  the  payment,  if  not  about  the  crea- 
tion, of  debt. 

This  leads  us  to  speak  of  the  record  of  county,  municipal,  and 
district  bonds  and  to  discuss  briefly  certain  typical  defaults.    In 
proportion  to  the  amount  of  bonds  put  out,  the  record   The  record  of 
of  municipal  bonds  is  better  than  that  of  state  bonds,    bonds'has 
Perhaps  this  is  true  largely  because  the  history  of   ^^^°  ^hat^of 
state  debts  is  longer  and  covers  much  more  of  the   state  bonds 
early  development  period  in  the  United  States,  when  the  popula- 
tion was  shifting  and  the  relation  of  the  people  to  their  various 
*  Thirteenth  Census  of  the  United  States  (1910),  vol.  i,  Population,  pp.  78-79. 


154      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

government  units  and  to  private  enterprise  was  in  a  more  or  less 
chaotic  condition.  Perhaps,  also,  the  completeness  of  the  legal 
remedy  in  the  case  of  municipal  bonds  has  had  a  tendency  to  re- 
strict the  amount  of  defaults.  At  the  same  time,  the  amount  of 
defaults  in  payment  of  interest  or  principal  of  county  and  mimici- 
pal  bonds,  if  we  include  all  cases  of  bonds  illegally  issued,  is  con- 
siderable. A  writer  in  the  "North  American  Review"  many  years 
ago  estimated  the  amount  of  defaulted  county,  city,  township,  and 
school-district  bonds  as  over  $300,000,000.^  Included  in  this  total 
was  a  large  amount  of  defaulted  bonds  in  such  States  as  Illinois, 
Missouri,  Kansas,  Nebraska,  and  the  Dakotas,  as  well  as  in  the 
Causes  of  South.^  As  in  the  case  of  state  defaults,  illegahty 

county,  usually  has  been  the  excuse  rather  than  the  reason. 

municipal  .       .  r      i    r       i       •  i         i  i  r 

and  district  The  prmcipal  causes  of  default  m  the  bonds  of 

counties,  municipalities,  and  districts  have  been :  — 
(i)  A  furor  for  improvements  similar  to  that  which  prevailed  at 
one  time  in  many  of  our  States  and  which  led  to  financial 
difficulties  at  one  time  or  another  of  such  cities  as  Pitts- 
burg, Pennsylvania,^  Elizabeth,  New  Jersey,^  and  Superior, 
Wisconsin.^ 

(2)  Issue  of  railroad-aid  bonds  or  bonds  for  other  doubtful  or 
illegal  purposes,  as  in  the  cases  of  Macon  County,  Missouri,^ 
St.  Clair  County,  Missouri,^  Green  County,  Kentucky,^ 
Taylor  County,  Kentucky,^  and  Otoe  County  (Nebraska 
City  Precinct),  Nebraska.^" 

(3)  Issue  of  bonds  by  small,  struggling  or  unstable  communities 
where  the  property  and  taxing  power  proved  insufficient  to 
take  care  of  the  bonds,  as  in  the  cases  of  Syracuse,  Kansas, ^^ 
Olympia,  Washington,  1-  Middlesboro,  Kentucky,^^  and 
Mobile,  Alabama.^" 

^  John  F.  Hume  in  the  North  American  Review,  August,  1884,  pp.  129  and  131. 
^  Ihid.,  p.  131,  and  C.  M.  Harger  in  Moody's  Magazine,  February,  1906,  p.  358. 
*  Commercial  and  Financial  Chronicle,  vol.  24,  p.  591.         *  Ibid.,  vol.  28,  p.  146. 
^  Ibid.,  vol.  79,  p.  2107.    The  defaulted  bonds  were  held  by  the  United  States 
Circuit  Court  of  Appeals  to  be  special  assessment  bonds. 

^  Ibid.,  vol.  92,  p.  1191.  '  Ibid.,  vol.  89,  p.  1293.       *  Ibid.,  vol.  96,  p.  1507. 

^  Ibid.,  vol.  95,  p.  1760.  ^^  Ibid.,  vol.  72,  p.  302. 

^1  Information  given  by  bankers. 

^^  Information  given  by  bankers. 

"  Ibid.    See  also  Commercial  and  Financial  Chronicle,  vol.  84,  p.  404. 

^*  Commercial  and  Financial  Chronicle,  vol.  25,  p.  382. 


COUNTY,  MUNICIPAL,  AND  DISTRICT  BONDS         1 55 

(4)  Special  misfortunes,  such  as  yellow  fever  epidemics  in  Mem- 
phis, Tennessee,^  and  Savannah,  Georgia,^  and  the  disas- 
trous floods  at  Galveston,  Texas.' 

(5)  Issue  of  bonds  by  municipal  irrigation  districts,  where  the 
inherent  risk  of  the  enterprise  is  considerable,  such  as  Denver- 
St.  Vrain  Municipal  Irrigation  District,  Colorado,^  Denver- 
Greeley  Irrigation  District,  Colorado,^  and  San  Arroya  Irri- 
gation District,  Colorado.^ 

The  above  examples  have  been  chosen  not  because  they  are  in 
every  case  the  worst,  but  because  the  information  is  available.^ 

There  have  been  also  a  few  cases  of  plain  bad  faith,  of  which 
mention  may  be  made  of  St.  Joseph,  Missouri,^  which  voted  to 
compromise  and  refund  a  city  bonded  debt  at  sixty  cases  of 
cents  on  the  dollar  with  reduced  interest  when  there  ^^'^  ^^^^^ 
was  no  necessity  for  any  default,  and  Fort  Worth,  Texas,^  which 
refunded  a  portion  of  its  old  6%  bonds  with  new  4%  bonds  without 
any  necessity  for  such  action  and  without  any  adequate  reason. 

A  recent  attempt  at  bad  faith,  which  proved  little  more  than 
amusing,  was  the  effort  of  the  Mayor  of  Atchison,  Kansas,  to  re- 
fund in  July,  1 91 3,  at  a  time  when  municipal  bonds   Attempted 
were  selling  to  yield  from  4^%  to  5%  net  income,  old   bjVtX^son, 
4%  bonds  with  new  4%  bonds  at  par  and  his  refusal   ^.ansas 
to  pay  off  the  old  bonds  in  cash.  The  result  of  this  attempt  was  the 
ruling  by  the  Kansas  Supreme  Court  that  it  had  jurisdiction  to 
require  levy  of  a  tax  to  pay  full  principal  of  the  bonds  and  forbid- 
ding any  tax  levy  unless  provision  was  made  for  them.^° 

In  the  matter  of  the  settlement  of  the  claims  of  bondholders  on 

^  Commercial  and  Financial  Chronicle,  vol.  31,  p.  328. 

*  Investor's  Supplement,  Commercial  and  Financial  Chronicle,  January  26,  1878, 
p.  xiii. 

'  Commercial  and  Financial  Chronicle,  vol.  71,  p.  564. 

*  Ibid.,  vol.  92,  pp.  476  and  972.  ^  Ibid. 

*  State  and  City  Section,  Commercial  and  Financial  Chronicle,  May  30,  1914, 

P-  145- 

^  See  Appendix,  "County  and  Municipal  Defaults,"  pp.  297-303. 

'  Commercial  and  Financial  Chronicle,  vol.  23,  pp.  135  and  175;  ibid.,  vol.  25, 
p.  408;  ibid.,  vol.  28,  p.  477. 

^  Ibid.,  vol.  69,  p.  711,  and  information  received  from  bankers. 

^^  Levison  v.  Finney,  no.  18,934,  Supreme  Court  of  Kansas.  This  case  never  was 
reported  for  the  reason  that  it  never  came  to  a  final  hearing  on  the  matter  of  levying 
a  tax.    (Letter  from  Clerk  of  Court,  November  7,  19 14.  See  Appendix,  p.  304.) 


156      AMERICAN  AND  FOREIGN  INVESTJVIENT  BONDS 

defaulted  county,  municipal,  and  district  bonds,  the  practice  has 
varied  all  the  way  from  full  settlement  of  interest  and 
made  with  principal,  as  in  the  case  of  Pittsburg,  Pennsylvania,^ 

on  the  so-called  Penn  Avenue  bonds,  to  a  failure  to 
pay  anything  at  all,  as  in  the  cases  of  the  railroad-aid  bonds  issued 
by  Green  County,  Kentucky,^  and  St.  Clair  County,  Missouri.' 
Elizabeth,  New  Jersey,^  Memphis,  Tennessee,^  and  New  Orleans, 
Louisiana,^  at  one  time  or  another  compromised  all  or  a  part  of 
their  debt  on  the  basis  of  fifty  cents  on  the  dollar.  Mobile,  Ala- 
bama,^ issued  $510  in  new  6%  bonds  for  every  $1000  of  old  8% 
bonds.  Macon  County,  Missouri,^  settled  an  aggregate  claim  of 
$2,200,000  with  $750,000.  ScaHng  of  the  principal  to  a  greater  or 
less  degree  has  taken  place  in  many  other  cases.^ 

On  the  whole,  reduction  in  interest  rather  than  scaling  of  the 
principal  has  been  the  rule.  Where  the  amount  of  bonds  has  been 
Bondholders  Small  and  whcre  the  prospect  has  been  nothing  worse 
often  have  than  a  scaUug  in  interest,  bondholders  often  have 

accepted  re-  "  tit 

duction  in  fouud  it  morc  advantagcous  to  accept  a  slight  reduc- 

thanl&ght  tion  in  interest  rather  than  fight  the  question  through 

through  courts  ^j^^  courts  with  the  possibility  in  some  cases  of  not 
being  able  to  collect  the  amount  of  the  probable  judgment. 

The  attitude  of  the  people  toward  repudiation  of  county  or 
municipal  obligations  has  been,  perhaps,  less  radical  than  the  at- 

.    ,    ,         titude  of  the  people  in  the  cases  of  certain  of  our 

Attitude  of  ,       i  .  r  r 

the  people  States.   With  the  exception  of  some  of  our  counties, 

promise  or  the  procceds  of  bonds  issued  have  not  been  wasted  to 

repudiation  ^j^^  same  extent  as  were  the  proceeds  of  some  of  our 
state  bonds.  Illegality  of  issue  as  an  excuse  for  compromise  or 
repudiation  has  been  used  almost  as  frequently;  but  the  knowledge 
of  the  existence  of  a  legal  remedy  in  the  case  of  counties,  munici- 
paHties,  and  districts,  —  suit  to  compel  levy  of  taxes  to  pay  interest 

1  Commercial  and  Financial  Chronicle,  vol.  28,  p.  302. 

2  Ibid.,  vol.  77,  p.  48;  vol.  84,  p.  949.  These  bonds  have  been  practically  invali- 
dated by  the  United  States  Supreme  Court. 

^  Ibid.,  vol.  89,  p.  1293.  State  and  City  Section,  Commercial  and  Financial 
Chronicle,  May  30,  1914,  p.  124. 

*  Commercial  and  Financial  Chronicle,  vol.  47,  p.  50.  ^  Ibid.,  vol.  37,  p.  202. 

"  Ibid.,  vol.  31,  p.  606-607.        ^  Ibid.,  vol.  21,  p.  302.       *  Ibid.,  vol.  92,  p.  1191. 

^  For  leading  steps  in  the  history  of  certain  county  and  municipal  defaults  and 
settlements,  see  Appendix,  pp.  297-300. 


COUNTY,  MUNICIPAL,  AND  DISTRICT  BONDS         157 

and  principal  of  bonds,  —  and  of  the  disposition  of  the  courts  to 
interpret  legality  of  issue  strongly  in  favor  of  maintaining  good 
faith,  have  caused  the  people  and  their  representatives  to  take  a 
firmer  attitude  toward  the  payment  of  their  debts.  As  a  rule,  the 
extent  of  the  effort  toward  compromise  or  repudiation  has  de- 
pended on  the  character  of  the  population. 

Aside  from  the  defaults  and  compromises  on  municipal  bonds, 
there  has  been  in  local  finances,  especially  of  recent  years,  a  con- 
siderable   amount    of    mismanagement    which    has   ,^. 

.  .  ,  .       .  Mismanage- 

threatened  to  lead  to  financial  difficulties.  This  situa-   ment  of  local 
tion  has  been  met  sometimes  by  passing  careful  gen- 
eral laws  governing  finances  of  municipalities,  as  in  Massachusetts, 
and  sometimes  by  estabHshing  a  commission  form  of  government,^ 
which  has  been  done  in  the  cases  of  Lawrence,  Massachusetts,^  Om- 
aha, Nebraska,'  Denver,  Colorado,'*  and  New  Orleans,  Louisiana.^ 
In  addition  to  the  size  and  character  of  the  population  and  the 
record  of  good  or  bad  faith,  the  factors  of  location,  present  pros- 
perity, and  probable  future  growth  are  important. 
These  are  questions  which  can  be  looked  up  fairly   ent%rosper[ty^ 
easily  in  the  cases  of  most  of  our  cities  and  towns.    l^^Jth^of 
In  addition  to  the  national  and  state  censuses,  the   communities 

'  are  important 

growth  of  cities  often  may  be  indicated  by  changes 

in  postal  receipts,  bank  clearings,  school  attendance,  and  other 

similar  indices. 

In  connection  with  municipal  bonds,  there  are  two  factors  which 
should  always  be  borne  in  mind:  (i)  That  the  obligations  in  order 
to  be  legally  binding  must  be  legally  issued;  and  (2)    Legality  of 
that  the  certificates  must  be  genuine  ^  and  in  proper   ceniScation  as 
form.    The  legality  of  the  issue  of  municipal  bonds  is   ^^  genuineness 
taken  care  of  usually  by  bankers  obtaining  the  opinion  of  first-class 

^  According  to  the  Boston  News  Bureau,  June  12,  1914,  6g  cities  out  of  195  having 
an  estimated  population  of  30,000  or  over  have  adopted  the  commission  form  of 
government.  Dayton,  Ohio,  is  given  as  the  only  city  of  30,000  people  or  over 
having  the  "city  manager  plan." 

^  State  and  City  Section,  Commercial  and  Financial  Chronicle,  May  30,  1914,  p.  24. 

^  Ibid.,  p.  130. 

*  Commercial  and  Financial  Chronicle,  vol.  96,  p.  5S0;  vol.  97,  p.  1522. 

*  Ibid.,  vol.  95,  p.  634. 

^  See  the  case  of  forgery  of  town  notes  in  Framingham,  Massachusetts,  Franklin 
Savings  Bank  v.  Inhabitants  of  Framingham,  212  Mass.  92, 


158      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

lawyers.  The  genuineness  of  the  certificates  often  is  arranged  by- 
certification  by  some  bank  or  trust  company  or,  as  in  the  case  of 
town  notes  in  Massachusetts  ^  and  bonds  in  North  Dakota,^  Ne- 
braska,^ and  Texas,^  by  certification  by  some  state  bureau  or  by 
state  and  county  officials.^ 

During  the  past  twenty-five  years  and  especially  during  the  past 
ten  or  a  dozen  years,  there  has  been  a  large  increase  in  the  amount 
Increase  in  of  couuty,  municipal,  and  other  local  debt.  The 
dpTund"other  accompanying  table  shows  aggregate  net  debt,  or 
local  debt  indebtedness  less  sinking-fund  assets,  and  net  debt 

per  capita  of  counties,  cities,  towns,  villages,  townships,  school 
districts,  and  other  subdivisions  in  the  United  States  for  1890, 
1902,  and  1913,  together  with  percentages  of  increase.^ 


Date 

Debt  less  sinking- 
fund  assets 

Per  cent  increase 

i8go-igo2  and 

1902-1913 

Per-capita  debt 
less  sinking- 
fund  assets 

Per  cent  increase 

i8go-igo2  and 

1902-1913 

1890 
1902 
1913 

$925,989,603 
1,630,069,610 
3,475,954,353 

76.0 
113.  2 

$14-79 
20.74 
35-81 

40.2 
72.6 

While  practically  all  these  increases  represent  the  creation  of 
debt  for  purposes  which,  broadly  speaking,  are  entirely  proper,' 
and  while  due  allowance  must  be  made  for  the  great  growth  of  the 
country  during  this  period,  the  amount  of  increase  certainly  is 

1  Acts  1910,  p.  616,  as  amended  by  Acts  1912,  chaps.  45  and  49.  See  also  Acts  1915, 
chaps.  84  and  285. 

2  Constitution  of  North  Dakota,  art.  xn,  sec.  187. 
'  Constitution  of  Nebraska,  art.  xii,  sec.  2. 

*  Acts  1895,  p.  184;  Acts  1901,  p.  16.  Revised  Civil  Statutes  of  Texas  (191 1),  title 
XVIII,  arts.  619-625. 

^  In  Georgia,  the  validity  of  proposed  bond  issues  is  determined  in  advance  by 
the  Superior  Court:  and  when  judgment  is  given  in  the  affirmative,  the  bonds  never 
thereafter  can  be  questioned.  {Acts  1897,  p.  82;  Code  of  the  State  of  Georgia  [1911], 
sees.  445-451.) 

^  Department  of  Commerce,  Bureau  of  the  Census,  Wealth,  Debt,  and  Taxation 
(1913),  vol.  I,  pp.  234-35. 

^  For  value  of  public  properties  and  assets  of  fimds,  other  than  sinking  funds,  of 
counties  in  1913,  see  Department  of  Commerce,  Bureau  of  the  Census,  County  Reve- 
nues, Expenditures,  and  Public  Properties,  1913  (Washington,  1915),  p.  298;  and  for 
figures  in  regard  to  incorporated  places  having  a  population  of  2500  and  over,  see 
Department  of  Commerce,  Bureau  of  the  Census,  Municipal  Revalues,  Expenditures, 
and  Public  Properties,  191 3  (Washington,  19 15),  p.  336. 


COUNTY,  MUNICIPAL,  AND  DISTRICT  BONDS         1 59 

startling.  During  the  past  twelve  or  fifteen  years,  large  sums  have 
been  expended  for  parks,  playgrounds,  and  other  permanent  im- 
provements. It  is  hard  to  escape  from  the  conclusion  that  this 
great  increase  in  local  debt  is  part  of  the  general  extravagance 
which  characterized  the  period.^ 

Perhaps  we  might  say,  with  the  likelihood  of  being  right,  that  the 
increase  in  municipal  debt  in  the  next  few  years  would  be  propor- 
tionately less  than  in  the  past  few  if  it  were  not  for  increasing 
the  more  or  less  general  movement  under  way  to-day  io  acquire°pub- 
toward  the  acquisition  by  municipalities  of  street  rail-  ^^^  utilities 
ways  and  of  gas  and  electric  lighting  plants.  We  find  that  even  in 
Massachusetts  municipal  ownership  of  electric  lighting  plants  has 
spread  to  a  considerable  extent. ^  We  find  in  addition  municipal 
lighting  plants  in  Vermont,  Connecticut,  New  York,  Pennsyl- 
vania, Ohio,  Michigan,  Kansas,  Oregon,  North  Carolina,  and 
many  other  States.'  ^.    .,    . 

.    .  .  ,         ,  .      ,     Distribution 

The  total  local  debt  m  1913,  as  given  by  the  Umted   of  local 
States  Census,  is  made  up  as  follows :  ^  ^    ^^^^ 


Amount 

Per  cent  of  total 

Counties 

$371,528,268 

2,985,555,484 
118,870,601 

10.7 
8S-9 

3-4 

Cities,  towns,  villages,  etc 

School  districts 

Total 

$3,475,954,353 

100. 0 

This  shows  the  bulk  of  our  local  debt  to  be  debts  of  cities,  towns, 
and  villages.^ 

^  For  short  discussion  of  increase  in  local  debts  of  Great  Britain,  France,  and  Ger- 
many, see  Hirst,  Credit  of  Nations  (Washington,  1910),  pp.  39,  94,  and  72.  For  an 
early  discussion  of  municipal  debt  in  the  United  States,  see  Atlantic  Monthly,  vol. 
xxxvni,  pp.  661-73  (Charles  Hale,  "Municipal  Indebtedness"). 

2  See  Twenty-ninth  Annual  Report,  Board  of  Gas  and  Electric  Light  Commissioners 
(Boston,  1914). 

'  State  and  City  Supplement,  Commercial  and  Financial  Chronicle,  May  30,  1914, 
passim.  The  debt  of  local  communities  in  Great  Britain  for  public  utilities  is  large. 
See  Hirst,  Credit  of  Nations  (Washington,  1910),  p.  45. 

*  Wealth,  Debt,  and  Taxation,  1913,  vol.  i,  p.  235. 

^  The  proportion  which  local  debt  bears  to  national  and  to  state  debt  may  be 
seen  from  the  following  figures  for  1913:  Nation,  $1,028,564,055;  States,  $345,942,- 
305;  minor  divisions,  $3,475,954,353;  total,  $4,850,460,713.  {Wealth,  Debt,  and  Taxa- 
,  tion,  1913,  vol.  I,  p.  229.) 


l6o      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Owing  somewhat  to  the  large  increase  in  the  supply  of  municipal 
bonds,  but  still  more  to  the  decline  in  the  prices  of  all  long-time, 
Decline  in  high-grade  bonds,  municipal  bonds  have  been  selling 

apafbonds^'"'     during  the  past  two  or  three  years  at  or  near  the  low- 
1902-12  gg^  prices  for  over  twenty  years.    The  following  table 

shows  prices  on  an  income  basis  of  the  bonds  of  some  of  our  leading 
cities  in  January,  1902,  and  January,  1912:  — 


Net  yield 


Cities 


Boston,  Massachusetts.  . .  . 
New  York ,  New  York .... 
Philadelphia,  Pennsylvania 

Chicago,  Illinois 

Milwaukee,  Wisconsin.  . . . 
St.  Paul,  Minnesota 


igi2 


3 

90% 

4 

10% 

?, 

90% 

4 

00% 

4 

00% 

4 

00% 

If  we  capitalize  a  thirty-year  4%  bond  on  a  3%  basis,  we  get  a 
price  of  119.69  and  interest;  if  we  capitalize  the  same  issue  on  a  4% 
basis,  we  get,  of  course,  a  price  of  100  and  interest.  If  we  do  the 
same  thing  with  a  twenty-year  4%  bond,  we  get  a  price  of  114.96 
and  interest  for  a  3%  basis  and  a  price  of  100  and  interest  for  a  4% 
basis.  These  figures  represent  very  fairly,  we  think,  the  extent  of 
the  decline  in  the  prices  of  the  leading  city  bonds  between  1902  and 
1912.^ 

The  effect  of  the  European  war  on  the  prices  of  municipal  bonds 
has  been  considerable.  The  following  prices  (see  table  on  page 
161),  obtained  by  reducing  basis  prices  given  in  dealers* 
lists  to  definite  prices  for  twenty-year  4%  bonds,  may 
be  of  interest.  ^ 

The  prices  given  in  the  table  show  an  average  decline  for  the 
year  of  2.43  points. 

^  Prices  taken  from  circulars  of  leading  bond  dealers  for  January,  1902,  and  Jan- 
uary, 1912. 

2  The  prices  of  New  York  City  bonds  are  reduced  from  the  New  York  Stock  Ex- 
change prices  as  given  in  the  Commercial  and  Financial  Chronicle,  vol.  99,  p.  32,  and 
vol.  loi,  p.  34. 


War  prices 


COUNTY,  MUNICIPAL,  AND  DISTRICT  BONDS         l6l 


Boston,  Massachusetts,  registered 

Providence ,  Rhode  Island 

New  York,  New  York 

Cleveland,  Ohio 

Minneapolis,  Minnesota 

Memphis,  Tennessee 

Portland,  Oregon 


July,  igi4 


(And  interest) 

lOO. CO 

loo. 69 
100.00 
98.64 
99.18 
94.72 
97-31 


July,  1915 


(And  interest) 


•32 

•32 

•25 

■65 

.04 

.59* 

■35 


*  Lowest  ofiering. 

In  closing  this  chapter,  we  would  give  as  our  opinion  that  county, 
municipal,  and  district  bonds  are  among  the  safest  mediums  of 
investment  in  the  world.  As  far  as  the  record  for  past  performance 
goes,  municipal  bonds  are  entitled  to  greater  con-   on  the  whole, 
sideration  than  any  of  our  state  bonds  except  the   bondsTre  ex- 
very  best.  To-day  the  laws  governing  the  creation  of    ceedingiy  safe 
debt  by  municipal  or  quasi-municipal  corporations  are  conserva- 
tive enough  to  make  investment  in  the  bonds  of  communities  even 
of  moderate  size  exceedingly  safe. 


CHAPTER  V 

STEAM-RAILROAD   BONDS 

Railroad  bonds  may  be  defined  as  the  obligations  of  railroad 
Definition  of  Companies  operating  their  properties  usually  with 
railroad  bonds  steam  and  doing  a  general  freight  and  passenger 
business. 

Such  bonds  may  be  of  various  kinds:  that  is,  first  mortgage, 
consolidated  mortgage,  general  mortgage,  collateral  trust,  deben- 
,,   .      , .  J       ture,  or  income  bonds.   A  first-mortgage  bond,  as  its 

Various  kinds  ... 

of  railroad  name  unplies,  is  secured  by  a  first  mortgage  on  all  or 

a  part  of  the  property  of  the  railroad  company.  A 
consolidated-mortgage  bond  usually  is  secured  by  a  first  mortgage 
on  a  portion  of  the  road  and  by  a  junior  mortgage  on  the  rest.  A 
general-mortgage  bond  usually  is  secured  by  a  junior  mortgage  on 
all  or  most  of  the  road.  A  collateral-trust  bond  is  secured,  as  a  rule, 
by  deposit  with  the  trustee  of  stocks  or  other  bonds  or  both.^  A 
debenture  bond  may  be  described  as  a  long-term  note  without 
security  other  than  the  general  credit  of  the  company.^  An  income 
bond  is  a  bond  the  interest  on  which  is  payable  when  earned.  Any 
one  of  the  above  kinds  of  bonds  may  be  convertible,  although  the 
usual  form  is  the  convertible  debenture,  that  is,  a  long-term  note 
of  the  company  convertible  into  stock. 

In  addition  to  the  above  kinds  of  securities,  all  which  may  be 
Equipment  Called  strictly  railroad  bonds,  there  are  equipment 
bond's^and'short-  bonds^  issued  for  Say  90  per  cent  of  the  cost  of  new 
term  notes         equipment  and  payable  in  annual  or  semiannual  in- 

^  Sometimes  an  entire  issue  of  first-mortgage  bonds  is  deposited,  as  in  the  case  of 
P^re  Marquette  Railroad  (Lake  Erie  &  Detroit  River  Railway)  4^%  bonds,  due  Au- 
gust I,  1932.  The  effect  of  this  is  to  make  the  collateral-trust  bonds  substantially  a 
first  mortgage  on  the  property  covered  by  the  collateral. 

^  In  Massachusetts  there  have  been  issued  by  various  railroad  companies,  such  as 
the  Boston  &  Albany  Railroad,  the  Old  Colony  Railroad,  and  the  Boston  &  Maine 
Railroad,  so-called  "plain"  bonds.  These  bonds  are  debentures  with  a  provision 
that  no  mortgage  can  be  placed  on  the  property  without  including  the  debentures. 
See  Acts  1913,  chap.  784,  sec.  15,  and  Acts  1854,  chap.  286,  sec.  3. 

^  The  title  to  the  equipment  rests  usually  with  the_^equipment  bondholder  trntil 
the  last  installment  is  paid  off. 


STEAM-RAILROAD  BONDS  1 63 

stallments  covering  a  period  of  perhaps  ten  years;  terminal  bonds, 
secured  on  freight  or  passenger  terminal  property  including  real 
estate,  and  often  guaranteed  by  railroad  companies;  and  short- 
term  notes,  having  usually  from  one  to  three  years  to  run. 

The  considerations  which  determine  the  strength  of  railroad 
bonds  are  considerably  different  from  those  applying  j^^jj^^g^^j  ^^^^^ 
to  government,  state,  or  municipal  bonds.  The  latter   payable  not 

,  •!         J     from  taxes,  but 

classes  are  payable  out  of  taxes,  whereas  railroad  from  property 

bonds  are  payable  out  of  the  property  or  earnings  of  °^  ^armngs 
the  corporation. 

In  considering  the  safety  of  railroad  bonds,  the  vital  Leading  fac- 

,  •  tors  governing 

questions  are :  —  safety  of  raii- 

(i)  Relation  of  assets  or  property  to  debt.^  '""^^  ^"""^^ 

(2)  Relation  of  net  earnings  to  fixed  charges. 
In  case  of  default  in  interest  or  principal  of  mortgage  bonds,  the 
bondholders  have  the  right  to  foreclose  on  the  property,  just  as  the 
holders  of  real-estate  mortgages  have  the  right  in  case  Remedies  for 
of  default  to  foreclose  on  the  real  estate.  In  the  case  non-payment 
of  default  on  plain  or  debenture  bonds,  the  bondholders  have  the 
right  to  sue  at  law  on  the  bonds  and  also  on  the  coupons,  but 
stand  on  no  better  footing  than  other  unsecured  creditors.  ^  As  far 
as  legal  rights  go,  first-mortgage  bondholders  have  the  right  to 
have  their  entire  claim  paid  from  the  proceeds  of  foreclosure  sale 
before  anything  goes  to  the  holders  of  second-mortgage  or  deben- 
ture bonds.  As  a  matter  of  history  and  practice,  however,  holders 
of  defaulted  first-mortgage  bonds  often  have  had,  like  other  bond- 
holders, their  claim  satisfied  in  reorganization  through  the  issue  of 
new  securities  in  place  of  their  old  bonds.^  This  subject  will  be  dis- 
cussed more  fully  later  on  in  this  chapter. 

^  In  determining  the  strength  of  collateral-trust  bonds  or  guaranteed  bonds,  there 
are  two  or  more  companies  to  be  considered  instead  of  one;  that  is,  in  the  case  of 
collateral-trust  bonds,  not  only  the  issuing  corporation,  but  also  the  corporation  or 
corporations  responsible  for  the  value  of  the  collateral;  and  in  the  case  of  guaranteed 
bonds,  not  only  the  issuing  but  the  guaranteeing  corporation. 

2  In  England  the  word  "debenture"  usually  implies  a  charge  upon  the  property 
of  the  corporation  and  a  priority  over  subsequent  creditors  and  over  existing  creditors 
not  possessing  such  a  charge.  Depending,  of  course,  on  the  terms  used  in  each  case, 
it  may  be  said,  in  general,  that  a  debenture  in  England  partakes  of  the  nature  of  an 
equitable  mortgage.   See  Jones,  Corporate  Bonds  and  Mortgages  (3d  ed.),  sec.  32. 

'  It  is  to  be  remembered  that  in  many  railroad  receiverships  and  reorganizations 
certain  underlying  issues  are  not  in  default  and  are  not  disturbed  at  all. 


164      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Beginning  in  England  and  in  this  country  in  an  important  way 
in  the  early  thirties,  the  railroad  business  has  shown  an  enormous 
Beginnings  and  almost  continuous  growth  from  that  time  until 
o°th?rrii?oad  the  present.  The  first  railroad  of  any  importance  in 
business  England  was  the  Liverpool  &  Manchester  Railway 

opened  for  public  traffic  in  1830  "with  eight  of  Messrs.  Stevenson 
&  Co.'s  locomotive-engines."  "•  In  the  United  States,  the  first  im- 
portant railroad  was  the  Baltimore  &  Ohio,  which  had  in  operation 
twenty-three  miles  of  road  in  1830.  It  was  for  two  years  thereafter 
worked  with  horse  power.  ^  Among  other  early  railroads  in  the 
United  States  were  the  Boston  &  Providence,  the  Boston  &  Lowell, 
the  Erie,  the  Philadelphia  &  Reading,  and  portions  of  the  New 
York  Central  and  Delaware  &  Hudson  systems.  A  short  time 
before  and  not  long  after  the  Civil  War  many  of  the  western  rail- 
roads were  built,  such  as  the  Chicago,  BurHngton  &  Quincy,  the 
Chicago,  Milwaukee  &  St.  Paul,  the  Chicago  &  Northwestern,  the 
Illinois  Central,  the  Atchison,  Topeka  &  Santa  Fe,  and  the  Union 
Pacific.  In  1832,  there  were  in  operation  in  the  United  States  only 
229  miles  of  line;  in  1912,  there  were  in  operation  246,816  miles.* 

Outside  of  pubHc  securities  and  possibly  real  estate,  railroad 
securities  are  the  best-known  medium  of  investment  throughout 
Steam  railroad  the  civiHzed  world.  Until  the  past  fifteen  or  twenty 
bav?be°en\  ycars  in  this  country,  steam  railroad  bonds  prac- 
mediumof  tically  have  divided  with  government,  state,  and 

investment         municipal  issucs  the  entire  bond  market. 

In  our  opinion  there  are  many  considerations,  however,  which 
Conditions  should  prompt  invcstors  to  use  great  care  in  select- 
surrounding        jj^pr  railroad  bonds.  It  is  to  be  remembered:  (i)  that 

the  railroad  °  ,  . 

industry  call  in  most  cascs,  railroads  m  the  United  States  are  en- 

cise  of  great  gaged  in  a  competitive  business,  that  is,  in  any  given 

part  o?  ^^^  territory  of  any  considerable  size,  there  are  usually 

investors  ^^q  qj.  j^^ore  important  railroad  systems  competing 

*  Alexander  Gordon,  A  Treatise  on  Elemental  Locomotion,  etc.  (London,  1836),  p.  55. 

'  Poor's  Manual  of  Railroads  for  1872-72,,  p.  xxvi.  The  first  tram-road  in  the 
United  States  was  opened  in  1826.  It  ran  from  the  Quincy  Granite  Works  in  Massa- 
chusetts to  the  Neponset  River  and  was  operated  with  horse  power.  (Poor's  Manual 
for  i86g-70,  p.  xxii.) 

^  Poor's  Manual  of  Railroads  for  1912,  Introduction,  p.  cxxxvii,  and  Interstate 
Commerce  Commission,  Twenty-fifth  Annual  Report  on  the  Statistics  of  Railways  in 
the  United  States  (Washington,  1914),  P-  n- 


STEAM-RAILROAD  BONDS  1 65 

with  each  other  more  or  less  keenly;  (2)  that  the  gross  income  of 
railroads,  owing  to  the  fact  that  it  is  derived  in  most  cases  largely 
from  the  movement  of  freight,  may  fall  off  a  good  deal  in  times  of 
general  business  depression;  (3)  that  the  railroads  have  been  and 
are  now  subject  to  dual  and  more  or  less  conflicting  regulation  by 
federal  and  state  authorities;  (4)  that,  owing  to  a  variety  of  causes, 
the  cost  of  financing  and  operating  the  railways,  particularly  during 
the  past  fifteen  years,  has  risen  without  the  railways  having  been 
able  to  obtain  a  sufficient  increase  in  earnings  to  offset  the  increased 
cost.  These  conditions,  combined  in  many  cases  with  incapable  or 
dishonest  management,  have  led  from  time  to  time  to  very  unfortu- 
nate results  for  investors. 

With  a  few  notable  exceptions  —  of  which  we  may  mention  now 
the  New  York  Central,  the  Pennsylvania,  the  Chicago,  Burlington 
&  Quincy,  the  Chicago,  Milwaukee  &  St.  Paul,  and   „     . 

,       ,  R.Gceiverships 

the  Illinois  Central  —  the  important  railroad  systems  and  reorgani- 
now  serving  the  United  States  have  been  in  the  hands 
of  receivers  or  have  been  reorganized,  in  whole  or  in  part,  from  one 
to  three  times.  Out  of  a  total  bonded  debt  for  all  roads,  January  i, 
1875,  of  about  $2,000,000,000,  there  were  in  default  at  some  time 
between  September  20,  1873,  and  January  i,  1876,  bonds  amount- 
ing to  $783,967,665.'-  The  following  table  2  shows  the  number, 
mileage  and  total  capitalization  of  railroads  placed  in  the  hands  of 
receivers  for  the  years  involving  the  largest  total  capitalization 
from  1876:  — 


Year 


Number  of  roads 


Miles  of  road 


Bonds  and  stocks 


1876 
1884 

1893 
1908 

1913 
191S 


42 
37 
74 
24 

17 

la 


6,662 

11,038 

29,340 

8,009 

9,020 

20,143 


$467,000,000 
714,755,000 

1,781,046,000 
596,359,000 
477,780,820 

1,070,808,628 


On  June  30,  1894,  there  were  in  the  hands  of  receivers  192  rail- 
ways operating  40,819  miles  of  road  and  with  a  total  capitalization 

^  Commercial  and  Financ-ial  Chronicle,  vol.  22,  p  76. 

*  Railway  Age  Gazette,  December  31, 1915  (vol.  59),  p.  1222. 


1 66     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

of  about  $2,500,000,000.^  The  roads  in  the  hands  of  receivers  at 
this  time  operated  nearly  one  fourth  of  the  mileage  and  had  nearly 
one  fourth  of  the  total  capitalization  of  all  the  railroads  in  the 
United  States. ^  In  October,  191 5,  there  were  in  the  hands  of  re- 
ceivers 41,988  miles  of  road  with  a  total  capitalization  of  $2,264,- 
002,178.' 

A  variety  of  causes  may  be  given  to  account  for  these  experi- 
ences, but  the  leading  reasons  may  be  given  as  follows:  (i)  Over- 
building of  railroads  or  building  ahead  of  the  growth 
of  railroad  of  the  country;  ■*  (2)  heavy  bonded  debts  and  fixed 

charges;  (3)  unrestrained  competition;  (4)  increased 
costs  of  labor,  materials,  and  supplies,  and  increased  taxes;  (5) 
mismanagement,  misjudgment,  or  lack  of  integrity  of  those  in  con- 
trol; (6)  excessive  interference  on  the  part  of  legislatures,  commis- 
sions, and  other  government  bodies;  (7)  the  industrial  depressions 
following  the  panics  of  1873,  1884,  1893,  and  1907.^ 
_.^    , .     ,  A  brief  statement^  of  some  of  the  forms  which  rail- 

Difficulties  of  .  ..,..,, 

individual  road  diiiiculties  took  m  cases  of  certam  individual 

railroads  may  be  of  interest.   (See  page  167). 

Since  the  receiverships  following  1893,  there  have  been  two 

periods  in  which  railroad  difficulties  have  become  of  considerable 

importance:  one  after  the  panic  of  1907,  when  such  roads  as  the 

^  Interstate  Commerce  Commission,  Seventh  Annual  Report  on  the  Statistics  of 
Railways  in  the  United  States  (Washington,  1895),  p.  10. 

^  Ibid.,  pp.  12  and  41. 

'  Railway  Age  Gazette,  October  15,  1915  (vol.  59),  p.  676.  The  figures  include 
two  small  Canadian  roads. 

*  Between  1870  and  1885,  the  total  miles  of  road  in  the  United  States  increased 
from  52,922  miles  to  128,320  miles,  or  over  142  per  cent;  between  1880  and  1895,  a 
period  of  fifteen  years,  the  total  mileage  increased  from  93,262  miles  to  181,115  miles, 
or  over  94  per  cent.  (See  Introduction  to  Poor's  Manual  of  Railroads  for  1912,  p. 
cxxxvii.) 

^  See  Commercial  and  Financial  Chronicle,  vol.  22,  p.  76;  Investors'  Supplement 
of  the  Commercial  and  Financial  Chronicle,  October  25,  1884,  p.  i;  Introduction  to 
Poor's  Manual  of  Railroads  for  1885,  pp.  v  to  x;  Investors'  Supplement  of  the  Com- 
mercial and  Financial  Chronicle,  March  31,  1894,  p.  2;  Poor's  Manual  of  Railroads 
for  1895,  pp.  V  to  viii.  (The  depression  of  1913  and  the  effect  of  the  European  War 
might  be  added.) 

8  The  material  for  the  accompanying  table  has  been  taken  from  Stuart  Daggett, 
Railroad  Reorganization  (Boston  and  New  York,  1908),  pp.  16-17,  20-22,  34-40, 
48,  51,  53-54,  58-59,  61,  75,  77,  81,  96-101,  118,  121-26,  158,  164,  166-68,  175-78, 
193,  196-97,  199,  202,  204-09,  221-24,  228-29,  231-33,  235-36,  240,  264-65,  267, 
280-81,  284,  286-87,  289, 


STEMI-RAILROAD  BONDS 


167 


Railroad 


Erie. 

(NewYork&ErieR.R.) 


(Erie  Railway.) 


(New  York,  Lake  Erie 
&  Western  Railroad.) 


Nortkerrt     Pacific     Rail- 
road. 


Philadelphia  6*  Reading 
Railroad. 


Atchison,     Topeha    &• 
Santa  Pe  Railroad. 


Southern  system. 

(Richmond    &   W  .  P. 
Terminal  Ry.  &  Ware- 
house.    Richmond    & 
Danville  R.R.  Central 
RR.&  Bkg.  of  Georgia.) 

Vniort  Pacific  Railway. 


Baltimore  &•  Ohio  Rail- 
road. 


Date 


1859 
187s 

1884 
1893 

187s 
1893 

1880 
1884 
1893 


1893 


1892 


1893 


1896 


Form  of  failure. 


Assignment. 
Receivership. 

Receivership. 


Default  followed  by  reor- 
ganization without  re- 
ceivership or  foreclosure 

Receivership. 


Receivership. 
Receivership. 

Receivership. 
Receivership. 
Receivership. 


Reorganization  without 
receivership  or  foreclo- 
sure. 

Receivership. 


Receiverships. 


Rectivership. 


Receivership. 


Causes  of  trouble 


Difficulty  of  getting  enterprise  under 
way. 

Rate  war  with  K.Y.  Central.  Heavy 
storms  and  ice  floods,  1857.  Panic  of 
1857  and  depression  which  followed. 

Gross  overcapitalization  and  waste  of 
assets  under  Gould  and  Fisk.  Inade- 
quacy of  previous  reorganizations. 
Severe  competition.  Falsification  of 
accounts  and  payment  of  dividends 
not  earned.     Six-foot  gauge. 

Heavy  capitalization  of  previous  reor- 
ganization. Irregularities.  Failure 
of  Grant  &  Ward. 

Failure  of  previous  reorganization  to 
reduce  fixed  charges  sufficiently.  Pro- 
hibition of  pooling.  Unprofitable 
lease  of  the  N.Y.,  Penn.  &  Ohio. 

Lack  of  population  and  business  in  ter- 
ritory served.  Failure  of  Jay  Cooke 
&  Co.  before  completion  of  the  road. 

Extensive  building  and  purchase  of  un- 
profitable branches.  Unprofitable 
leases.  Unwise  distributions  to  stock- 
holders. 

Heavy  capitalization.  Excessive  and 
undiscriminating  purchases  of  coal 
lands. 

Inefficiency  of  previous  reorganization. 
Unprofitable  leases  and  purchases. 
Payment  of  dividends  not  earned. 

Lack  of  profit  in  coal-holdings  of  the 
Philadelphia  &  Reading  Coal  &  Iron 
Company.  Unprofitable  leases.  Pur- 
chases of  stock  of  the  Boston  & 
Maine  Railroad  and  other  New  Eng- 
land railroads  to  an  e.xtent  not  justi- 
fied by  the  resources  of  the  Reading. 

Competitive  overbuilding  and  exten- 
sions into  thinly  settled  territory. 

Overexpansion,  including  acquisition  of 
the  St.  Louis  &  San  Francisco  Rail- 
road. Conversion  of  income  bonds  of 
previous  reorganization  into  bonds 
carrying  a  fixed  charge.  Misrepresen- 
tation of  the  earnings  and  true  condi- 
tion of  the  company. 

Large  part  of  mileage  unprofitable. 
Poor  physical  condition.  Graft  and 
mismanagement. 


High  original  cost  of  construction,  in- 
cluding the  Credit  Mobilier  scandal. 
Consolidation  with  the  Kansas  Pacific 
and  Denver  Pacific  Raib-oads  on  ab- 
surd terms,  and  acquisition  of  other 
lines  at  the  dictation  and  for  the 
profit  of  Jay  Gould.  Severe  compe- 
tition. Rapid  extension  of  unprofitable 
branch  line  mileage. 
Excessive  competition,  through  rate- 
cutting  and  other  methods,  leading 
to  a  gradual  weakening  of  the  whole 
financial  structure  of  the  company. 
Irregularities  of  those  in  control. 
Payment  of  dividends  not  earned. 


1 68     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Seaboard  Air  Line,  Chicago  Great  Western,  Western  Maryland, 
and  Wabash  were  placed  in  the  hands  of  receivers: 

Railroad  diffi-  ,  ,        ,  ^  ,  ,  -r        •     o   o 

cuities  1907  and  another  m  1913  to  1915,  when  the  St.  Louis  &  San 
1913  191S  jTrancisco,  Cincinnati,  Hamilton  &  Dayton,  Interna- 
tional &  Great  Northern,  Rock  Island,  Missouri  Pacific,  Missouri, 
Kansas  &  Texas,  and  many  other  roads  were  placed  in  the  hands 
of  receivers.^  The  difficulties  of  these  railroads  have  been  too 
recent  to  make  possible  a  careful  and  impartial  statement  of  the 
special  causes  of  failure. 

A  consideration  of  the  specific  causes  of  many  of  our  earlier  rail- 
road troubles  shows  that  these  difficulties  were  caused  partly  by 
the  general  conditions  surrounding  railroad  operation 

Summary  of  i  ,      ,         ,       i      ,        r-     ,  i 

causes  of  rail-      and  partly  by  the  lack  01  judgment  or  unscrupulous 
management  of  those  who  controlled  the  properties. 
Just  how  far  one  set  of  causes  and  how  far  the  other  affected  the 
results  in  any  given  case  it  is  impossible  to  say. 

In  1887,  a  step  was  taken  which  has  led  already  to  important 
restraints  on  the  management  of  railroads  by  private  interests. 
^    , ,. ,  This  was  the  establishment  of  the  Interstate  Com- 

Establisnment  ,     ,  ,    .  ,  ... 

of  the  merce  Commission. ^  Origmally  this  commission  sim- 

Commerce  ply  heard  cases  of  alleged  unjust  discrimination  in 

Commission        service  and  rates,  and  the  Commission  found  most  of 
these  cases  to  be  not  well  founded.^ 
Later  the  Commission  received  additional  powers.   In  1906,  it 
obtained  the  power  not  merely  to  set  aside  existing 

Increase  m  .,  ,  •  i 

powers  of  the      railroad  rates  as  unjust  or  unreasonable,  but  to  estab- 
lish new  ones.'*  In  1910,  it  obtained  authority  to  sus- 

1  In  October,  1915,  it  seems  reasonable  to  say  that  the  railroads  as  a  whole  have 
"turned  the  comer,"  for  the  time  being,  from  their  most  acute  troubles. 

^  An  act  to  regulate  commerce,  approved  February  4,  1887,  and  in  eflfect  April  5, 
1887  (24  Stat.  L.  379),  as  amended  by  an  act  approved  March  2,  1889  (25  Stat.  L. 
855);  by  an  act  approved  February  10,  1891  (26  Stat.  L.  743);  by  an  act  approved 
February  8,  1895  (28  Stat.  L.  643);  by  an  act  approved  June  29,  1906  (34  Stat.  L. 
584);  by  a  joint  resolution  approved  June  30,  1906  (34  Stat.  L.  838);  by  an  act  ap- 
proved April  13,  1908  (35  Stat.  L.  60);  by  an  act  approved  February  25,  1909  (35 
Stat.  L.  648);  by  an  act  approved  June  18,  1910  (36  Stat,  L.  539);  by  an  act  approved 
August  24,  1912  (37  Stat.  L.  566);  by  an  act  approved  March  i,  1913  (37  Stat.  L. 
701).    See  U.S.  Compiled  Statutes  (1913),  vol.  4,  Title  LViA,  chap.  A,  sees.  8563-8604. 

^  See  Charles  Lee  Raper,  Railway  Transportation  (New  York  and  London,  19 12) 
p.  264.   Also  Reports,  Interstate  Commerce  Commission,  passim. 

*  Act  approved  June  29,  1906  (34  Stat.  L.  584). 


STEAM-RAILROAD  BONDS  169 

pend  changes  in  rates  pending  a  hearing.^  This  power  to  suspend 
rates  is  the  power  of  which  the  railroad  managers  have  complained 
at  times  so  bitterly.  The  Commission  in  these  matters  may  act  on 
its  own  initiative. 

In  addition  to  the  regulation  exercised  by  the  Interstate  Com- 
merce Commission,  there  has  been  an  immense  amount  of  regula- 
tion and  attempted  regulation  by  state  legislatures    ^     i   •     u 
and  later  by  state  public-service  commissions.  Accord-    state  legis- 
ing  to  James  J.  Hill:  "Within  three  years,  ending  in   public-service 
1907,  twenty-five   States  enacted  car-service  laws,^   commissions 
twenty-three  regulated  train  service  and  connections,  twenty-two 
fixed  maximum  passenger  rates,   nine  enacted  maximum  freight 
rates,  thirty-sLx  regulated  the  general  corporate  affairs  of  common 
carriers."  *  To  be  included,  perhaps,  in  the  last-named  class  of 
legislation  may  be  mentioned  laws  forbidding  combination  and  con- 
soHdation,  compelling  changes  in  construction  of  road  or  rolling- 
stock,  and  shortening  the  hours  of  labor  of  employees."*  Many  of 
these  laws  were  enacted  without  any  adequate  examination  or 
proper  understanding  of  their  fairness,  and  many  of  them  later 
were  declared  unconstitutional  by  the  courts.^ 

In  general  it  may  be  said  that,  under  present  conditions,  the  rela- 
tion of  steam  railroads  to  the  public  is  in  great  confusion.  Unlike 
street-railway,  gas,  and  electric  light  properties  lo- 
cated wholly  within  one  State,  most  of  the  steam  rail-   steam  railroads 
roads  are  subject  to  regulation  both  by  the  Federal   i^in  great  '^ 
Government  and  by  individual  States.  The  viewpoint   '^^^^^^^^'^ 
of  the  railroad  men  is  expressed  as  follows:  "A  misdirected  public 
opinion  is  demanding  rates  too  low,  taxes  too  high,  wages  too  high, 
service  too  elaborate,  and  there  are  not  cents  enough  in  the  dollar 
to  meet  all  these  demands  and  still  permit  the  business  to  be  attrac- 
tive enough  so  the  man  with  a  dollar  will  invest  it."  ^  It  is  to  be 

'  Act  approved  June  18,  1910  (36  Stat.  L.  539,  sec.  12). 

2  For  a  discussion  by  railroad  interests  of  the  so-called  "full-crew  laws,"  see 
Bureau  of  Railway  Economics,  The  Arguments  for  and  against  Train-Crew  Legisla- 
tion (Washington,  D.C.,  1915),  consecutive  no.  73. 

^  James  J.  Hill,  Highways  of  Progress  (New  York,  191  o),  p.  272. 

*  For  citation  of  some  of  these  laws,  see  Appendix,  pp.  305-306. 

5  For  examples  of  such  laws  which  have  been  held  unconstitutional,  see  Appen- 
lix,  pp.  306-307. 

*  Howard  Elliott,  The  Truth  About  the  Railroads  (Boston  and  New  York,  1913), 
pp.  154-55- 


170      MIERICAN  AND  FOREIGN  INVESTMENT  BONDS 

noted  that  at  least  three  different  bodies  are  in  a  position  to  inter- 
fere with  the  net  income  of  railroads:  that  is,  (i)  the  Interstate 
Commerce  Commission  may  suspend  or  reduce  rates;  (2)  the  state 
legislatures  or  commissions  may  reduce  rates  and  may  prescribe 
regulations  which  will  increase  expenses;  and  (3)  arbitration  boards 
may  raise  wages.  ^ 

Furthermore,  the  regulation  of  any  given  railroad  by  the  States 

through  which  its  lines  run  may  conflict,  not^only  as  to  service  and 

rates,  but  in  the  matter  of  issue  of  new  securities. 

Regulation  by  •!  i  i  t  • 

States  of  issues  Interstate  railroads  under  present  conditions  some- 
times have  to  obtain  the  authority  of  two  or  more 
States  in  order  to  finance  themselves.  Examples  of  this  may  be 
found  in  our  New  England  railroads,  where,  for  instance,  the  con- 
sent of  New  York  State  as  well  as  of  Massachusetts  is  necessary 
for  the  issue  of  bonds  by  the  Boston  &  Albany  Railroad;  of  Maine, 
New  Hampshire,  and  Massachusetts  for  the  issue  of  securities  by 
the  Boston  &  Maine  Railroad;  and  of  Massachusetts  and  New 
York  for  security  issues  by  the  New  York,  New  Haven  &  Hartford 
Railroad.  2 

In  view  of  the  fact  that  interstate  traffic,  according  to  James  J. 
Hill,  constitutes  from  65  to  97  per  cent  of  the  total  traffic  over 
large  areas  of  the  country,^  and  in  view  of  the  diffi- 
probkmmay^  culty  of  distinguishing  between  state  and  interstate 
bJthep'edeLi  traffic,^  it  would  seem  that  the  final  solution  of  this 
Government       difficult  Question  Hcs  in  some  form  of  control  by  the 

alone  ^  '' 

Federal  Government  alone. 
A  step  in  this  direction  was  attempted  in  the  decision  of  Judge 
Sanborn,  of  the  United  States  Circuit   Court,  in  the  so-called 
Minnesota  Rate  Cases.^  The  legislature  of  the  State  of  Minnesota 

^  Arbitration,  however,  is  not  compulsory.  See  "An  Act  proxiding  for  mediation, 
conciliation,  and  arbitration  in  controversies  between  certain  employers  and  their 
employees,"  approved  July  15,  19 13  (Public  Laws  of  the  United  States  of  America 
[63d  Cong.,  ist  Sess.,  1913],  chap.  6,  38  Stat.  L.  part  i,  p.  103). 

^  Maine,  Laws  191 3,  chap.  129,  sec.  35;  Massachusetts,  Acts  191 3,  chap.  784, 
sec.  16;  New  Hampshire,  Laws  1911,  chap.  164,  sec.  14a,  as  amended  by  Laws  1913, 
chap.  145,  sec.  14;  New  York,  Consolidated  Laws  of  the  State  of  New  York  (1910), 
vol.  IX,  chap.  48,  sec.  55,  and  chap.  49,  sec.  8,  par.  10. 

'  Highways  of  Progress,  p.  280.   See  also  Raper,  Railway  Transportation,  p.  252. 

*  See  Marshall  M.  Kirkman,  Railway  Rates  and  Government  Control  (Chicago  & 
New  York,  1892),  pp.  295-301. 

^  Shepard  v.  No.  Pac.  Ry.  Co.,  184  Fed.  765.  (1911.) 


STEAM-RAILROAD  BONDS  171 

had  enacted  statutes  reducing  passenger  fares  within  that  State 
about  ^;^^  per  cent  and  reducing  freight  charges  on  Decision  of 
certain  commodities  within  the  State  about  7.37  per  'n^Minnesota 
cent.  By  orders  of  the  Minnesota  Railroad  and  Ware-  ^^*^  ^^.ses 
house  Commission,  general  merchandise  freight  charges  on  ship- 
ments wholly  within  the  State  were  reduced  by  from  20  to  25  per 
cent,  and  certain  specific  charges  on  freight  shipped  from  distribut- 
ing points  just  within  the  border  of  the  State  to  other  points  in 
the  State  were  reduced.  Suits  were  brought  by  shareholders  of  the 
railroads  affected  involving  the  question  whether  the  orders  of  the 
commission,  and  the  acts  of  the  legislature  described,  substantially 
burdened  and  regulated  interstate  commerce  on  the  railroads  of 
these  companies.  Judge  Sanborn  found  that  "each  of  the  acts  and 
orders  challenged  has  the  natural  and  necessary  effect  substantially 
to  burden  and  directly  to  regulate  interstate  commerce,  to  create 
undue  and  unjust  discriminations  between  localities  in  Minnesota 
and  those  in  adjoining  States,  and  it  is  unconstitutional  and  void." 
He  said  further:  "To  the  extent  necessary  completely  and  effectu- 
ally to  protect  the  freedom  of  and  to  regulate  interstate  commerce 
the  nation  by  its  Congress  and  its  courts  may  affect  and  regulate 
intrastate  commerce,  but  no  farther.  To  the  extent  that  it  does  not 
substantially  burden  or  regulate  interstate  commerce  a  State  may 
regulate  the  intrastate  commerce  within  its  own  borders,  but  no 
farther.  If  the  plenary  power  of  the  nation  to  protect  "the  freedom 
of  and  to  regulate  interstate  commerce  and  the  attempted  exercise 
by  a  State  of  its  power  to  regulate  intrastate  commerce,  or  the 
attempted  exercise  of  any  of  its  other  powers,  impinge  or  conflict, 
the  former  must  prevail  and  the  latter  must  give  way,  because  the 
Constitution  and  the  acts  of  Congress  passed  in  pursuance  thereof 
are  the  supreme  law  of  the  land,  and  '  that  which  is  not  supreme 
must  yield  to  that  which  is  supreme.'"  This  decision,  it  seems  to 
us,  would  have  the  practical  effect  of  giving  the  Federal  Govern- 
ment substantial  control  of  almost  all  railroads. 

The  decision  later  was  reversed  by  the  United  States  Supreme 

Court  ^  in  an  opinion  delivered  by  Mr.  Justice  Hughes.  The  court 

took  the  position  that  (i)  although  the  power  of  Congress  over 

interstate  commerce  is  paramount,  and  (2)  although  a  State  has 

^  Simpson  et  al.  v.  Shepard,  230  U.S.  352.  (1913.) 


172      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

no  power  to  regulate  directly  interstate  commerce,  and  (3)  al- 
Decision  of  the  ^^ough,  whenever  Congress  exercises  its  power  over 
United  States      interstate  commerce  in  any  respect,  no  state  action 

Supreme  Court         -  i-i  it  •  .,.  , 

in  the  Minne-  01  any  Kind  can  modify  or  impair  directly  or  m- 
ate  ases  (^|j.g(,|-|y  g^^,]^  national  action,  yet  (4)  the  several 
States  have  power,  in  the  absence  of  action  by  the  Federal  Govern- 
ment, to  regulate  their  own  intrastate  commerce  and  (5)  state 
regulation  of  intrastate  commerce  is  not  void  by  reason  merely  of 
its  indirect  effect  on  interstate  commerce,  unless  it  conflicts  with 
some  actual  exercise  by  Congress  of  the  national  power  over  inter- 
state commerce. 

In  the  Shreveport  Rate  Cases,  ^  in  which  also  the  opinion  was 
dehvered  by  Mr.  Justice  Hughes,  the  court  took  the  position  that 
Comparison  of  whcrc  the  Interstate  Commerce  Commission  previ- 
Shreveport^"  ously  had  fixed  an  interstate  rate  on  a  basis  higher 
Rate  Cases  ^]j^j^  ^-j^g^^-  permitted  by  the  State  of  Texas  for  intra- 
state rates,  the  interstate  rate  should  prevail.  In  the  Minnesota 
cases,  the  railroads  could  avoid  that  "unjust  discrimination" 
which  Congress  had  forbidden  by  reducing  their  interstate  rates  to 
the  basis  of  the  Minnesota  intrastate  rates;  but  in  the  Shreveport 
cases,  the  railroads  could  not  do  this,  because  the  rate  already  fixed 
by  the  paramount  national  authority  was  higher  than  that  allowed 
by  the  state  authorities.  The  only  alternative  was  to  disregard  the 
Texas  intrastate  rates. 

We  have  discussed  these  two  cases  rather  fully  for  the  reasons 
that  they  are  both  fairly  recent  and  also  because  they  bring  out  the 
Significance  of  cver-recurring  difficulties  of  harmonizing  state  and 
Cou?t"decbiOTs  federal  control  of  railroad  rates.  While  the  two  deci- 
in  the  two  cases  gious  of  tlie  Supreme  Court  are  not  inconsistent,  it 
may  be  fair  to  say  that  in  one  case  emphasis  is  laid  on  the  state 
power  over  rates,  whereas  in  the  other  it  is  laid  on  the  federal 
power  over  rates. 

A  possible  escape  from  this  situation  may  be  either  (i)  the  fed- 
^  J     ...  eral  licensing  of  all  railroads  doing  an  interstate  busi- 

Federal  hcense  ^  ,  ... 

or  federal  ncss  or  (2)  the  federal  incorporation  of  all  interstate 

mcorpora  ion       j-aiij-Qads.   Under  the  first  plan,  the  railroads  would 

»  Houston,  East  &  West  Texas  Railway  ei  al.  v.  United  States  et  al.,  234  U.S. 
342.  (1914.) 


STEAM-RAILROAD  BONDS  173 

retain  their  state  charters,  but  would  obtain  permission  to  do  an 
interstate  business  only  on  such  terms  as  the  Federal  Government 
might  impose,  which  permission  might  amount  practically  to  exclu- 
sive federal  regulation.  Under  the  second  plan,  the  railroads  doing 
an  interstate  business  could  get  rid  entirely  of  state  regulation.  In 
the  words  of  the  former  Commissioner  of  Corporations,  "The  one 
merit  of  the  federal  incorporation  plan  is  that  it  is  based  upon  a 
clean-cut,  legal  theory,  that  it  brings  the  entire  matter  of  interstate 
commerce  under  one  jurisdiction,  and  reduces  to  a  minimum  the 
friction  that  must  occur  between  federal  and  state  authorities  in 
the  attempt  on  the  part  of  the  Federal  Government  to  regulate 
interstate  commerce."  ^  Either  federal  licensing  or  federal  incor- 
poration of  the  mterstate  railroads  would  be  a  long  step  toward 
exclusive  federal  control  of  all  the  railroads,  and  therefore  toward 
the  solution  of  this  phase  of  the  railroad  problem. 

We  have  spoken  of  exclusive  federal  control  as  probably  the  best 
solution  of  this  conflict  between  federal  and  state  authority  over 
the  railroads.  We  have  suggested  federal  licensing  or   Government 
federal  incorporation  of  mterstate  railways.  There  is   ownership 
another  alternative.  That  alternative  is  government  ownership.^ 

Government  ownership  may  work  out  in  two  ways:  (i)  Owner- 
ship and  operation  by  the  Government;  (2)  ownership  by  the 
Government  and  lease  to  private  companies  for  oper-   Government 
ation.  This  latter  method  was  recommended  in  1881    °JJ^;;J^P^^^y 
by  an  Italian  commission  which  investigated  the 
entire  subject  of  government  ownership  in  practically  all  coun- 
tries.3  In  general,  however,  we  will  discuss  government  ownership 
as  being  synonymous  with  government  operation. 

1  Report,  Commissioner  of  Corporations,  December,  1904,  Appendix  C,  pp.  61 

2  The  only  experiments  which  the  United  States  Government  has  made  along 
these  hnes  are:  (i)  Panama  Railroad,  which  the  Government  purchased  in  1904  and 
has  since  operated,  and  (2)  the  proposed  federal  railway  in  Alaska.  Neither  of  these 
experiments  is  likely  to  be  of  any  particular  significance  in  connection  with  the  broad 
question  of  government  ownership.  (For  Panama  Railroad,  see  Poor  s  Mamial  of 
Railroads  for  1915,  pp.  1912-13,  and  Annual  Reports  of  the  Panama  Railway  Com- 
pany. For  act  authorizing  the  President  of  the  United  States  to  locate,  construct, 
and  operate  railroads  in  the  Territory  of  Alaska,  approved  March  12  19 14,  see 
Public  Laws  of  the  United  States  of  America,  no.  69,  63d  Congress,  38  Stat.  L.,  part  i, 

p-  30s) 
»  Raper,  Railway  Transportation,  pp.  109-10. 


174      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

The  extent  to  which  government  ownership  of  railroads  prevails 
throughout  the  world  is  not,  perhaps,  fully  appreciated.  In 
Europe,  out  of  the  total  mileage  in  191 2  of  207,295 
government  miles,  107,663  milcs,  or  5 1. 9  per  cent,  were  state- 
owners  ip  owned. ^  Great  Britain  was  the  only  important 
European  country  which  had  no  state-owned  railways.  In  Asia, 
58  per  cent  of  the  mileage,  in  Africa,  59.7  per  cent,  and  in  Aus- 
tralasia, 93.6  per  cent  of  the  mileage  was  state-owned.  The  total 
mileage  of  the  world  for  1912  was  639,621  miles,  of  which  188,258 
miles  were  state-owned. ^  This  becomes  even  more  striking  when  we 
remember  that  the  United  States  alone  in  191 2  had  241,056  miles 
of  road,  all  privately  owned. 

There  are  many  strong  arguments  in  favor  of  government 
ownership  and  operation  of  all  the  railways  in  the  United  States. 
Arguments  in  In  Order  to  get  the  bearing  of  the  whole  subject  on 
government  railroad  Credit,  we  will  summarize  the  leading  argu- 
ownership  ments   as  follows:    (i)  It  would  do  away  forever 

with  the  perplexing  conflict  between  federal  and  state  regulation; 
(2)  it  would  solve  the  still  more  difficult  problem  of  trying  to 
prevent  by  regulation  so-called  discrimination  between  persons 
and  places  and  yet  at  the  same  time  forcing  under  the  Sherman 
Act '  competition  between  the  railroads;  (3)  it  might  lead  to  a 
comprehensive  if  not  entirely  economical  use  of  railroads  and  water- 
ways for  the  benefit  of  the  whole  country;  (4)  it  would  put  an 
end  to  the  immense  railroad  lobby  system  by  which  in  the  past 
attempts,  too  often  successful,  have  been  made  to  influence  legis- 
latures and  courts;  (5)  it  would  lead,  if  properly  managed,  to 
a  greater  standardization  of  service;  (6)  it  should  result  in  elimi- 
nation of  many  expenses  at  present  necessary  to  the  railroads,  such 
as  complete  executive  staffs  for  each  railroad  and  solicitors  whose 
business  is  simply  to  get  freight  for  one  railroad  as  against  another; 

^  Out  of  a  total  mileage  of  37,973  in  Germany,  34,604,  or  91. i  per  cent,  was  state- 
owned;  in  France  out  of  a  total  mileage  of  30,668  only  5,509,  or  18  per  cent  was 
state-owned. 

2  Figures  from  London  Times,  October  i,  1912,  p.  15  ("The  World's  Railways"), 
and  based  on  Archiv  fiir  Eiscnbahnwesen,  May  and  June,  191 2,  published  by  the 
Prussian  Ministry  of  Public  Works,  Berlin.  See  also  Samuel  O.  Dunn,  Government 
Ownership  of  Railways  (New  York  and  London,  1915),  pp.  381-84. 

3  See  act  approved  July  2, 1890,  26  Stat.  L.  209,  U.S.  Compiled  Statutes  (1901),  vol. 
3,  p.  3200. 


STEAM-RAILROAD  BONDS  175 

(7)  it  might  make  less  difficult  the  raising  of  the  immense  amounts 
of  new  capital  which  almost  all  railroad  men  agree  are  necessary  in 
order  that  the  railroads  may  perform  adequate  service;  (8)  it 
might  have/if  properly  handled,  the  effect  of  knitting  together  the 
country  still  more  closely  than  at  present  and  of  bringing  the  people 
in  closer  touch  with  the  Government.  Some  of  these  objects  could 
be  attained,  to  be  sure,  without  government  ownership,  but  they 
all  might  be  accomplished  imder  that  system. 

Against  government  ownership  and  operation  of  railroads  in  the 
United  States  at  the  present  time  may  be  urged  the  following: 
(i)  Operation  of  the  railways  by  the  Government  Arguments 
probably  would  result,  as  it  has  in  Europe,  in  a  set  of  government 
rules  or  principles  for  service  and  rates  too  rigid  prop-  ownership 
erly  to  serve  and  develop  the  country;  (2)  allowing  for  the  loss 
in  taxes,  it  would  probably  result,  as  it  has  in  most  European 
countries,  with  the  possible  exception  of  Germany,  either  in 
a  net  loss  or  a  very  slight  profit  from  operation;  (3)  there  is  no 
reason  to  suppose  that  it  would  result,  any  more  than  it  has  in 
Europe,  in  better  freight  service  or  in  lower  freight  rates;  (4)  it 
would  place  over  1,800,000  men,^  the  present  employees  of  the 
railroads,  with  their  families,  under  possible  political  domination, 
a  situation  likely  to  result  in  injustice  to  the  men  and  in  danger 
to  our  system  of  government;  (5)  it  would  entail  on  the  Federal 
Government  the  creation  of  a  huge  debt,  the  safety  of  which  would 
depend  to  a  large  extent  on  the  success  with  which  the  railroads 
were  operated;  (6)  the  strongly  individualistic  character  of  our 
people,  the  complicated  structure  of  our  government,  and  the 
many  widely  scattered  large  centers  of  wealth  and  population,  as 
agamst  the  highly  centralized  conditions  in  such  countries  as 
France  and  Germany,  would  indicate  less  success  for  government 
ownership  in  this  country  even  than  in  Europe;  (7)  until  regula- 
tion has  been  tried  thoroughly  on  the  most  intelligent  and  most 
modem  lines  government  ownership  is  unnecessary. 

The  experience  with  state-operated  railways  in  Europe  and  else- 
where has  not  been  of  a  kind  to  induce  the  United   j^^^^j^g  ^^ 
States  to  enter  on  the  experiment.    The  most  sue-   state  operation 

T-       -n  ^^  Europe 

cessful  state  railways  abroad  have  been  the  rrus- 

1  Interstate  Commerce  Commission,  Twenty-sixth  Annual  Report  of  the  Statistics  of 
Railways,  p.  23. 


176     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

sian.  These  have  been  operated  so  as  to  give  excellent  and  cheap 
passenger  service,  fair  freight  service,  and  so  as  to  show  to  the  Gov- 
ernment a  considerable  net  income  above  all  charges.  They  have 
been  managed  with  all  the  military  efl5ciency  of  the  Prussian  Govern- 
ment. It  is  questionable  whether  the  operation  of  the  Prussian  rail- 
ways has  been  for  the  best  interests  of  industry  and  commerce.^ 
The  state  railways  of  Japan,  with  practically  the  lowest  freight  and 
passenger  rates  of  any  railways  in  existence,  have  been  operated 
with  distinct  financial  success.  This  has  been  made  possible  by 
the  efficiency  of  the  Government  and  by  the  low  cost  of  living.^ 
The  operation  of  the  state  lines  in  Italy,  whatever  the  reasons,  has 
been  so  far  notably  unsuccessful  in  almost  all  respects.'  The  op- 
eration of  the  state  railways  in  Austria  has  not  resulted  in  par- 
ticularly low  rates  and  it  has  resulted  in  a  net  loss  to  the  Govern- 
ment.'* The  Hungarian  state  railways  usually  have  earned  less 
than  their  interest.  The  same  is  true  to  a  greater  or  less  degree 
of  the  state  railways  in  France,  Russia,  Belgium,  Canada,  Argen- 
tina, and  even  Germany,  outside  the  Prussia-Hesse  lines.^  The 
Swiss  state-operated  railways  have  sought  to  please  all  the  people 
by  lowering  rates,  increasing  facilities,  and  raising  wages.  Roads 
which  under  corporate  management  had  been  making  a  good 
showing  have  shown  under  ten  years  of  government  administra- 
tion a  deficit.^  On  all  state  operated  railways,  except  possibly  in 
Prussia  and  Japan,  the  tendency  has  been  to  increase  the  num- 
ber of  employees  beyond  all  reason.^  It  is  perhaps  fair  to  say  that, 
with  the  exception  of  Prussia  and  Japan,  state  operation  has  not 
justified  itself  on  economic  grounds.^  On  pohtical  grounds,  it  may 
have  done  so,  though  this  always  will  be  a  matter  of  opinion.* 

1  Dunn,  Government  Ownership  of  Railways,  pp.  130,  310-13,  325;  Raper,  Railway 
Transportation,  pp.  143,  150,  155,  164,  303;  Logan  G.  McPherson,  Transportation  in 
Europe  (New  York,  19 10),  pp.  168-69. 

^  Dunn,  pp.  296,  313-14,  324-26. 

^  Dunn,  pp.  315-16;  Raper,  pp.  no,  119-20;  McPherson,  pp.  173-75. 

*  Dunn,  p.  317;  Raper,  p.  295;  McPherson,  p.  173.  ^  Dunn,  pp.  303-30. 

^  McPherson,  pp.  172,  200.  For  a  doubt  raised  as  to  whether  the  Swiss  state  rail- 
ways have  shown  a  net  profit  or  a  net  deficit,  see  Dunn,  p.  324. 

^  McPherson,  pp.  199-200. 

8  For  another  statement  of  financial  results  of  government  operation  in  Germany, 
France,  Belgium,  Holland,  Switzerland,  Russia,  Austria-Hungary,  and  Italy,  see 
McPherson,  pp.  168-75. 

^  The  great  war  in  Europe  has  led  to  military  or  government  operatioa  of  most  of 
the  railways  in  the  countries  at  war. 


STEAM-RAILROAD  BONDS  177 

Regulation  is  not  open  to  many  of  the  objections  that  apply  to 
government  ownership.    It  has  been  in  Great  Britain  and  in  the 
United  States  a  natural  development  and  one  con-   ^^  uiation  not 
sistent  with  the  individual  initiative  of  the  people   open  to  many 

.  -       ,      .  of  the  objec- 

and  the  democratic  nature  of  their  government,  tions  to  govern- 
While  the  principles  and  methods  of  regulation  to  be  ^^^^  owners  ip 
applied  have  at  times  been  in  great  confusion,  the  broad  outlines 
to-day  are  becoming  pretty  well  defined. 

Regulation  in  Great  Britain,  where  all  the  railways  are  privately 
owned,  has  been  based  on  practical  expediency.   In  Great  Britain 
and  Ireland,  the  railways  are  under  the  supervision   ^^  ui^tion  in 
of  a  commission  called  the  Railway  and  Canal  Com-   Great  Britain 

.     .  ■,       r    r  1  -J.  at^d  Ireland 

mission,  composed  of  five  members,  servmg  a  term 
of  five  years:  two  members  appointed  by  the  Crown  and  three 
ex-officio.  Of  the  appointed  members  one  must  be  an  expert  on 
railway  transportation.  The  ex-officio  members  are,  in  England, 
the  Lord  Chancellor;  in  Scotland,  the  Lord  President^of  the  Court 
of  Session;  and  in  Ireland,  the  Lord  Chancellor  of  Ireland.  These 
officials  can  in  each  case  designate  a  judge  of  the  highest  court  to 
serve  on  the  Railway  and  Canal  Commission.  The  Commission  at 
work  must  be  composed  of  the  two  appointed  members  and  one 
ex-officio,  the  former  to  be  judges  of  fact  and  the  latter  of  law.  Regu- 
lation in  Great  Britain  has  tended  toward  the  monopoly  prin- 
ciple and  has  gone  on  the  basis  of  minimum  interference  with  the 
operation  of  the  railways.  It  has  been,  on  the  whole,  fairly  efficient 
and  satisfactory.^ 

In  France,  where  nearly  five  sixths  of  the  mileage  is  operated 
by  private  companies, ^  the  railways  are  under  the  control  of  the 
Ministry  of  Public  Works.  Attached  to  this  Ministry  Regulation 
are  six  departments,  one  for  each  of  the  large  systems  '"  France 
including  that  operated  by  the  State.  Supervision  is  divided  on 
the  lines  of  (i)  technical  control;  (2)  commercial  control;  (3)  finan- 
cial control.    There  is  a  commercial  advisory  council  in  which  two 

^  Raper,  pp.  52,  55,  58,  100,  212.  See  also  Dunn,  pp.  17-19. 

*  In  France,  the  Government  has  made  large  advances  in  the  cases  of  the  privately 
owned  railways  in  the  form  of  guarantees  of  interest  and  dividends.  By  the  end  of 
1958,  imless  present  plans  are  changed,  all  the  railways  will  be  amortized  and  will 
become  the  property  of  the  Government  without  compensation.  (Raper,  pp.  72-73; 
Dunn,  pp.  20-22.) 


178      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

elements'are  represented:  (i)  the  Government;  (2)  commercial  and 
industrial  interests  and  the  general  public.  French  control  of  the 
railways  has  paid  more  attention  to  abstract  justice  than  to  prac- 
tical expediency.  It  has  represented,  perhaps,  the  maximum  of 
interference.  Supervision  has  covered  all  important  matters  of 
operation  and  finance,  including  the  approval  of  the  issue  of  new 
securities.  French  control  of  the  railways  has  been  strong  and 
effective,  but  has  been  too  much  inclined  to  act  with  rigid  imi- 
formity.^ 

We  have  outlined  the  systems  of  regulation  in  Great  Britain 

and  France  for  the  sake  of  the  light  they  may  throw  on  our  own 

railroad  problems.  These  two  countries  are  the  only 

Europe  has  /  .      -r-.  i        •  i  -i  i 

much  to  teach  oncs  of  miportaucc  in  Europe  having  a  large  railroad 
regulation  mileage  under  private  operation.    Germany,  Italy, 

o  rai  ways  ^^^  Russia,  in  their  machinery  for  the  state  operation 
of  their  railways,  have  many  points  of  interest  to  any  one  attempt- 
ing to  outline  a  plan  of  exclusive  federal  regulation  for  railways  in 
the  United  States. 

There  have  been  recently  many  suggestions,  some  of  them  based 
on  European  models,  of  plans  for  regulating  the  railways.  There 
Interstate  ^^  ^  general  agreement  that  the  Interstate  Commerce 

Commerce  Commission,  with  its  membership  limited  as  at  pres- 

Commission  ^  \  ^  ,  '^         • 

at  present  ent,  IS  physically  unable  to  consider  and  solve  the 

to  handle  vast   and    complicated  problems  arising   from    the 

t  e  pro  em  financing  and  operation  of  something  like  250,000 
miles  of  railroad,  traversing  forty-eight  States,  and  serving  a 
population  in  the  neighborhood  of  100,000,000.  In  its  magnitude 
OutHne  f  r  ^^^  ^  ^^^  Complexity,  the  problem  is  entirely  dif- 

exciusive  fed-      fercut  from  that  of  regulation  of  railroads  in  such 

eral  regulation  .  ,  .    _  _^    .      . 

in  the  United      a  territory  as  that  of  Great  Britam. 
^^^^^  A  possible  outline  for  exclusive  federal  regulation, 

at  least  of  all  interstate  railways,  is  as  follows:^ 

(i)  Enlarging  the  membership  of  the  Interstate  Commerce  Commis- 
sion so  as  to  include  men  experienced  in  railroad  operation,  traffic 

*  Raper,  pp.  95  and  100;  Dunn,  pp.  19-24. 

2  See  Samuel  Rea,  as  quoted  in  the  Annalist  (New  York),  vol.  4,  p.  442.  E.  P. 
Ripley,  as  quoted  in  the  Commercial  and  Financial  Chronicle,  vol.  99,  p.  1334.  See  also 
Annalist,  vol.  4,  p.  392.  Commercial  and  Financial  Chronicle,  vol.  99,  pp.  1505,  1509; 
Raper,  Railway  Transportation,  passim ;  McPherson,  Transportation  in  Europe. 


STEAM-RAILROAD  BONDS  1 79 

and  finance  and  also  men  of  broad  business  experience.  This  would 
be  thoroughly  in  line  with  the  machinery  used  in  some  form  or 
other  in  France,  Germany,  Italy,  and  Russia. 

(2)  Making  the  term  of  ofl&ce  for  a  long  period  of  years  and  the  com- 
pensation sufficient  to  attract  and  retain  men  of  the  widest  experi- 
ence and  greatest  ability, 

(3)  Dividing  the  United  States  into  sections  for  railroad  supervision 
much  as  the  national  banking  system  has  been  divided  under  the 
Federal  Reserve  Act.  Such  units  as  the  Interstate  Commerce 
Commission  uses  in  reporting  statistics  of  the  railways  or  any  other 
convenient  units  could  be  used.  This  division  of  territory  would 
follow  the  precedents  set  in  France,  Germany,  and  Italy. 

(4)  Compelling  the  railroads  to  give  reasonably  efficient  service. 

(5)  Allowing  combination  and  consolidation  of  railroad  properties 
where  such  action  will  lead  to  improved  service  or  lower  rates. 

(6)  Allowing  the  railroads  to  charge  rates  ^  for  their  services  which  will 
insure  efficient  and  economical  operation,  allow  reasonable  provi- 
sion for  maintenance,  depreciation,  and  obsolescence,  and  give  a 
return  to  the  security-holders  sufficient  to  make  possible  the  rais- 
ing of  new  capital. 

(7)  Having  Congress  refer  to  the  Interstate  Commerce  Commission 
for  investigation  and  report  legislation  concerning  service,  rates, 
wages,  and  other  matters  affecting  the  net  income  of  the  railways. 

(8)  Limiting  the  power  to  suspend  rates  without  a  hearing  to  a  period 
not  over  sLxty  days,  after  which,  unless  otherwise  ordered,  advanced 
rates  shall  become  effective. 

(9)  Supervision  by  the  Interstate  Commerce  Commission  when  effec- 
tively organized  of  the  issue  of  new  securities  including  amounts  to 
be  issued  and  the  purposes  for  which  the  money  is  to  be  spent.  ^ 

(10)  Publicity  of  accounts. 

This  general  plan  could  be  modified  as  experience  showed  its 
defects.  The  adoption  of  some  such  plan  would  increase  greatly 
the  safety  of  railroad  bonds. 

In  the  matter  of  giving  the  Interstate  Commerce   ^derarsuper- 
Commission  or  some  other  federal  body  the  authority   yis'on  of  the 

.  .....  issue  of  new 

to  supervise  the  issue  of  new  securities,  it  is  interest-   securities 

^  For  confinnation  by  the  United  States  Supreme  Court  of  broad  supervisory 
power  of  the  Interstate  Commerce  Commission  over  rates,  see  the  so-called  Inter- 
moimtain  Rate  Cases,  decided  June  22, 1914.  (United  States  of  America,  Interstate 
Commerce  Commission  et  al.,  v.  Atchison,  Topeka  &  Santa  F6  Ry.  Co.  et  al.,  234 
U.S.  476). 

2  See  Twenty-eighth  Annual  Report,  Interstate  Commerce  Commission,  part  i,p.  65. 


l8o     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

ing  to  note  that  such  diverse  interests  as  Mr.  James  J.  Hill,  on 
the  one  hand,  and  the  National  Association  of  Railway  Commis- 
sioners, on  the  other,  agree  as  to  the  wisdom  of  this.^ 

Regulation  of  rates  —  the  only  other  point  in  this  programme 

of  regulation  which  we  will  discuss  at  the  present  time  —  is  the 

crux  of  the  whole  "railroad  question."   In  the  regu- 

Rates  must  be  .  i        r        i  .  ,  . 

reasonable  and  latiou  of  ratcs  the  fundamental  considerations  are 
compensatory  ^^Qf qIcJ  :  (i)  The  rates  must  be  just  and  reasonable; 
(2)  they  must  not  be  so  low  as  to  be  confiscatory.  Neither  the 
States  nor  Congress  itself  can  force  a  railroad  company  to  serve 
the  pubhc  without  just  compensation.  What  rates  are  reasonable 
and  what  rates  give  a  fair  return  to  the  railroads  are  questions 
very  difficult  to  decide.^ 

The  basis  of  rate-making  in  the  United  States,  before  authority 
was  given  to  the  Interstate  Commerce  Commission  to  change 
Bases  of  ratcs,  was  to  charge  shippers  all  that  the  traffic  would 

rate-making  bear,  in  Connection,  of  course,  with  whatever  compe- 
tition a  given  railroad  had  to  meet.  Since  the  grant  of  authority 
to  the  Commission  over  rates,  there  has  been  more  of  a  tendency 
than  formerly  to  use  the  cost-of-service  principle  as  a  basis  for 
rates.  This  is  very  largely  the  practice  on  the  state-owned  railways 
in  Europe.  Charging  what  the  traffic  will  bear  usually  is  best 
adapted  to  developing  the  country,  but  it  is  likely  to  lead  to  dis- 
criminations; ^  charging  on  the  basis  of  the  cost  of  the  service  is 
Ukely  to  be  too  rigid  to  allow  for  the  proper  growth  and  develop- 
ment of  the  country. 

Very  often  not  only  what  is  a  proper  rate,  but  what  is  a  possible 
rate  has  to  be  decided.  In  discussing  the  limits  of  high  and  low 
railroad  rates,  Mr.  James  J.  Hill  has  called  attention  to  the  fol- 

^  Highways  of  Progress,  p.  136.  Report  of  the  Committee  on  Railway  Capitali- 
zation, Proceedings  of  the  Twenty-fifth  Annual  Convention  of  the  National  Asso- 
ciation of  Railway  Commissioners  (Washington),  pp.  212-13. 

'  See  Constitution  of  the  United  States,  Amendment  V  and  Amendment  xiv,  sec.  i. 
Act  February  4,  1887,  Stat.  L.,  chap.  104,  sec.  i,  p.  379.  U.S.  Comp.  Stats.  1913,  sec. 
8563,  and  the  following  of  the  many  cases  dealing  with  this  question:  Smythe  v.  Ames, 
169  U.S.  466;  Lake  Shore  &  Michigan  Southern  Railway  Co.  v.  Smith,  173  U.S.  684; 
and  Interstate  Commerce  Commission  v.  Brimson,  154  U.S.  447. 

^  As  Mr.  Hill  has  remarked,  railroad  rates  in  a  wheat  country  must  insure  the 
profitable  raising  and  sale  of  wheat,  and  in  a  lumber  country  they  must  favor  the 
lumber  industry.  This  is  discrimination,  but  it  is  discrimination  for  the  purpose  of 
developing  the  country.   (J.  J.  Hill,  Highways  of  Progress,  pp.  256-58.) 


STEAM-RAILROAD  BONDS  l8l 

lowing  principles:  (i)  That  the  railroad  must  obtain  a  rate  which, 
in  addition  to  the  cost  of  taxes  and  a  proper  allow-   , .  .     , , .  ^ 

Limits  of  high 

ance  for  maintenance  and  other  necessary  charges,  and  low  rates 
will  pay  interest  on  its  bonds  and  fair  dividends  on 
its  stock;  (2)  that  the  shipper  must  obtain  a  rate  that  will  enable 
him  to  market  his  products  at  a  Hving  profit;  (3)  that  the  ideal 
rate,  if  it  can  be  ascertained,  is  one  which  will  result  in  the  greatest 
good  for  both  parties  —  that  is,  one  which  will  secure  to  the  rail- 
road the  greatest  volume  of  business  and  the  largest  net  return 
consistent  with  equal  benefits  to  the  producer  and  shipper.^ 

The  above  principles  may  be  described  as  the  starting-points 
for  rate-making.  The  determination,  however,  not  only  of  what 
rates  are  practicable  from  the  point  of  view  of  the   ^  ^    ,    , 

.  1  1      c    1  1     1       Federal  valu- 

common  prosperity  of  the  railroads  and  of  the  whole  atjon  of  the 
country,  but  also  of  what  rates  are  reasonable  and 
compensatory,  leads  us  to  the  question  of  railroad  valuation.  As 
is  well  known,  there  is  now  being  undertaken,  under  the  general 
supervision  of  the  Interstate  Commerce  Commission,  a  compre- 
hensive valuation  of  all  the  railways  in  the  United  States. ^  This 
valuation  is  at  present  in  charge  of  Mr.  C.  A,  Prouty,  formerly  of 
the  Interstate  Commerce  Commission. 

In  discussing  the  basis  on  which  this  valuation  is  to  be  made, 
Mr.  Prouty  has  said  that  the  following  factors  must  be  considered: 
Reproduction  new;  same,  less  depreciation,  dona-   Factors  to  be 
tions  of  cash,  land,  etc.,  by  Governments,  individu-   fedlraf "^^"^  *° 
als,  or  associations;  original  cost  of  all  lands  and   valuation 
terminals  and  present  value;  all  other  elements  of  value  and  parts 
of  value  assignable  to  each  State.   He  declares  that  the  work  will 
involve  an  accurate  map  and  inventory  of  the  property  of  every 
railroad  engaged  in  interstate  business  as  of  June  30,  1914,  to- 
gether with  other  maps  and  plans  showing  all  subsequent  addi- 
tions to  the  property.   These  inventories  must  be  verified  by  the 
Commission  with  surveying  parties  going  over  every  mile  of  road.' 

'  Highways  of  Progress,  pp.  254-55. 

*  Amendment  approved  March  i,  1913,  to  Interstate  Commerce  Act.  See  62d 
Cong.,  3d  Sess.,  chap.  92,  37  Stat.  L.  701. 

'  Speech  of  Mr.  Prouty  before  Chamber  of  Commerce  of  the  United  States,  Febru- 
ary II,  1914,  as  reported  in  the  New  York  Times  Annalist,  February  16,  1914,  p.  196. 
Mr.  Prouty  since  has  estimated  the  total  cost  of  ascertaining  the  value  of  all  the  prop- 


1 82      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Mr.  Prouty  points  out  the  difficulties  of  using  this  valuation  as 
conclusive  in  making  rates.  "It  is  impossible,"  he  says,  "to  shake 
-, ,    ,.       ,      a  single  railroad  free  from  every  other  and  fix  its 

Valuation  not  °  i       i       •  • 

conclusive  in       charges  upon  the  basis  of  a  fair  return  upon  its  fair 

making  rates  ,  ,  ,   .  .  , 

value,  as  you  would  m  case  of  a  gas  or  water  plant. 
The  rate  established  for  one,  of  necessity  influences  and  frequently 
absolutely  determines  the  rate  of  all."  ^  A  rate  calculated  to  give 
a  return,  for  instance,  of  6%  on  the  value  of  a  road  advantageously 
situated  and  with  a  large  business  might  mean  a  return  of  less 
than  6%,  and  sometimes  very  much  less  than  6%,  on  the  value  of 
other  roads  competing  with  it. 

In  summing  up  the  benefits  to  be  derived  from  valuation  of  the 
railways,  Mr.  Prouty  says,  "It  can  be  known  with  certainty 
Benefits  to  be  whether  the  general  level  of  rates  is  or  is  not  too 
derived  from  high."  He  coutinucs :  "While  this  valuation  will  be  of 
according  to  incidental  benefit  to  the  investor,  while  it  is  essential 
^°^  ^  to  the  work  of  the  rate-making  tribunal,  it  seems  to 
me  that  its  greatest  immediate  value  is  political.  The  state  of  the 
pubKc  mind  toward  our  railways  is  such  that  this  information  is 
absolutely  necessary."  ^ 

We  ourselves  are  thorough  believers  in  this  valuation  of  the 

railways  by  federal  authorities.    While  it  will  take  undoubtedly 

many  years  and  many  millions  of  dollars  to  complete, 

Summary  of  i       i  •!      •         mi  i        ,-       i  • 

valuation  and  while  it  will  not  be  final,  or  perhaps  even  im- 

ques  ion  portant,  in  determining  the  rates  to  be  charged  by 

any  given  railroad,  it  will,  in  our  opinion,  do  these  three  things:  (i) 
It  will  make  possible  at  least  an  approximation  of  the  value  of  the 
property  on  which  a  fair  return  by  the  railroads  of  the  country 
as  a  whole  should  be  earned;  (2)  it  will  clear  up  a  great  many 
misapprehensions  and  misunderstandings  on  the  part  of  the  public 
as  to  the  fair  value  of  railroad  property  compared  with  capitaliz- 
ation; (3)  if  government  ownership  ever  becomes  necessary,  such 

erties  of  the  carriers  at  something  over  $50,000,000,  of  which  the  raib-oads  would 
spend  about  $35,000,000  in  preparing  maps  and  other  data.  He  has  spoken  of  July, 
19 19,  as  the  time  when  the  valuation  may  be  completed.  (See  Commercial  and  Finan- 
cial Chronicle,  vol.  99,  pp.  1508-09,  and  Boston  News  Bureau,  November  4,  1914,  p.  6.) 

*  Speech  before  Chamber  of  Commerce  of  the  United  States,  New  York  Times 
Annalist,  February  16,  1914,  p.  197. 

*  Speech  of  Mr.  Prouty,  New  York  Times  Annalist,  February  16,  1914,  p.  197. 


STEAM-RAILROAD  BONDS  1 83 

a  valuation  will,  of  course,  be  a  necessary  preliminary  to  purchase 
of  the  railroads  by  the  Government. 

In  this  connection  the  valuations  of  railroad  property  already 
made  by  certain  of  our  States  is  interesting.   We   ,, ,     . 

•'  \     1         .  1  Valuations 

give  here  a  table  (on  page  184)  showmg  value  com-   of  railroad 
pared  with  capitalization  of  railroads  in  the  States  of   by  certain 
Michigan,  Wisconsin,  Minnesota,  South  Dakota,  and     ^^^^^ 
Washington.^ 

This  table  shows  a  capitalization  in  the  States  of  Minnesota 
and  Washington  very  much  below  the  estimates  for  the  cost  of 
reproduction  and  considerably  below  the  estimates  of  present 
value;  in  Michigan,  Wisconsin,  and  South  Dakota,  it  shows  a 
capitaUzation  somewhat  above  the  estimated  cost  of  reproduction 
and  considerably  above  the  estimated  present  value. 

We  are  of  the  opinion  that  a  valuation  of  all  the  railways  in  the 
United  States,  if  made  on  the  basis  of  allowing  for  all  proper 
elements  of  value,  will  prove  an  agreeable  surprise  to 
security-holders  and  to  the  public.  There  will  be  un-   ation  likely 
doubtedly  some  exceptions  in  cases  where  flagrant   agreeable 
and  unjustified  overcapitalization  has  taken  place.   ^*^^p"^^ 
In  the  early  days,  of  course,  as  special  inducements  for  raising  capi- 
tal to  build  the  railways,  liberal  nominal  issues  of  bonds  and  stocks 
were  made  compared  with  the  amount  of  money  received  for  the 
same.  The  increased  value  of  railroad  property,  however,  together 
in  many  cases  with  the  drastic  reorganizations  of  1893  to  1898,  have 
resulted  either  in  bringing  up  present  value  or  in  reducing  capital- 
ization so  that  the  margin  between  the  two  is  very  much  less  than 
it  was  once. 

In  addition  to  federal  supervision  and  federal  valuation  of  the 
railways,  there  are  various  reforms  that  perhaps  can  be  put  into 
practice  with  great  advantage  to  the  holders  of  rail- 
road securities.  The  following  points  have  been  sug-   railroad 
gested:  (i)  That  executive  officers  actually  should    ^°''™^ 
represent  the  great  body  of  stockholders  and  not  bankers  or  other 
parties  that  might  have  motives  other  than  the  general  good  of 
the  raihoad;  (2)  that  voting  by  proxy  should  be  abolished  in  favor 

^  These  valuations  are  not  always  made  up  on  exactly  the  same  basis,  but  they  will 
serve  as  a  reasonably  fair  comparison. 


1 84     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 


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steam-railroad]  bonds  185 

of  personal  voting  or  possibly  of  voting  directly  by  mail;  (3)  that 
railroad  directors  should  direct  and  should  receive  adequate  com- 
pensation for  satisfactory  service;  (4)  that  at  least  one  represent- 
ative of  the  employees  should  be  given  a  seat  on  the  board  of 
directors;  (5)  that  meetings  of  boards  of  directors  should  be  open 
to  stockholders  and  to  the  public;  (6)  that  minority  stockholders 
should  have  a  right,  when  they  disagree  with  the  decisions  of 
the  directors,  to  ask  the  courts  to  compel  the  corporation  to  pay 
the  expenses  of  an  appeal;  (7)  that  railroad  ofi&cials  should  be 
compelled  to  advertise  for  bids  for  all  purchases;^  (8)  that  railroad 
accounting  should  be  uniform,  so  that  every  one  can  see  how  any 
given  property  is  being  managed  compared  with  any  other;  (9) 
that  railroad  accounting  should  be  so  clear  as  to  make  impossible 
expenditures  of  money  for  influencing  legislation  without  the 
knowledge  of  the  public.  ^ 

In  discussing  in  this  book  the  lines  on  which,  in  our  opinion, 
exclusive  federal  regulation  of  the  railways  may  be 
carried  out  and  in  discussing  possible  reforms  in  rail-   lation  and 
road  management,  we  have  in  mind  not  so  much  the   SThL^r^f-° 
establishment  of  the  railways  on  a  basis  to  give  the   resuftln°better 
best  service  to  the  country,  —  though  from  another   service  to  the 

•'  '  "  country  and  m 

point  of  view  this  is  of  paramount  importance,  —  as   greater  safety 
we  have  the  prevention  of  the  recurrence  of  the  un- 
fortunate experiences  of  investors  in  railroad  securities  in  the  past. 

We  have  discussed  many  of  the  general  and  special  causes  of 
railroad  receiverships.    We  shall  try  now  to  give  a  brief  outline 
of  the  way  in  which  some  of  our  important  railroad   Railroad  re- 
reorganizations  have  worked  out  both  for  the  rail-   organizations 
roads  and  for  the  old  security-holders. 

In  seven  reorganizations  between  1880  and  1889, — Atchison 
(two).  East  Tennessee,  Erie,  Reading  (two),  and  Rock  Island,  — 
according  to  Mr.  Stuart  Daggett,  the  total  amount  of   Reorganiza- 
bonds  was  increased  from  $651,318,271  before  reor-   j'sso-sq 
ganization  to  $797,570,454  after  reorganization.    In   and  1893-^8 
seven  reorganizations  from  1893  to  1898,  —  Atchison,  Baltimore 

^  See  in  this  connection  section  10  of  the  "Clayton  Act,"  approved  October  15, 
1914;  38  Stat.  L.,  part  i,  chap.  323,  pp.  730,  734. 

^  See  statement  of  Charles  S.  Mellen,  as  reported  in  the  Boston  American,  May  31, 
1914;  also  Boston  News  Bureau,  June  2,  1914,  p.  i. 


1 86     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

&  Ohio,  Erie,  Northern  Pacific,  Reading,  Southern  and  Union 
Pacific,  —  the  total  amount  of  bonds  was  reduced  from  $924,978,- 
070  before  reorganization  to  $882,574,531  after  reorganization.^ 
In  the  reorganizations  before  1893,  fixed  charges  were  increased 
slightly  from  $43,276,372  to  $43,449,306;  whereas  in  the  reor- 
ganizations of  1893  to  1898,  fixed  charges  were  reduced  from 
$65,984,219  to  $45,576,984,  a  reduction  of  over  30  per  cent.^  In 
the  earlier  period,  rentals  increased  nearly  10  per  cent;  whereas 
in  the  later  period,  rentals  decreased  nearly  60  per  cent.^ 

The  reorganizations  of  both  periods  resulted  in  an  increase  in 
total  capitalization.  Those  before  1893  resulted  in  a  substantial 
General  sum-  increase  in  bonds,  while  the  items  of  preferred  and 
^mzadons'in  commou  stock  remained  practically  stationary;  the 
the  two  periods  reorganizations  of  1893  to  1898,  on  the  other  hand, 
resulted  in  a  considerable  decrease  in  the  amount  of  bonds,  a  very 
large  increase  in  preferred  stock,  and  a  substantial  increase  in 
common  stock.  In  other  words,  the  reorganizations  before  1893 
were  effected  principally  with  securities  the  charge  on  which  was 
obUgatory,  whereas  those  from  1893  to  1898  were  effected  to  a 
large  extent  with  securities  the  charge  on  which  was  optional.^ 

In  the  reorganizations  both  of  the  earlier  and  of  the  later  period, 

assessments  were  general.   These  assessments  bore  most  heavily, 

of  course,  on  the  junior  securities,  particularly  on  the 

common  stock.  This  was  true  to  a  less  degree  in  the 

earlier  period  of  reorganization  than  in  the  later. 

In  general,  it  may  be  said  that  the  earlier  reorganizations,  as 
was  shown  by  the  subsequent  failures  of  many  of  the  same  roads, 
Earlier  reor-  Were  much  less  effective  than  were  the  later  reorganiz- 
fe^sTeffective  ations.  In  the  earlier  period  security-holders  were 
than  later  ones  handled  too  tenderly,  and  the  necessary  reductions  in 
fixed  charges  were  not  made  and  often  the  necessary  amounts  of 
new  capital  not  raised.  In  most  of  the  later  reorganizations,  fixed 
charges  were  reduced  sufficiently  and  the  necessary  amounts  of 
new  capital  raised. 

Perhaps  it  will  be  of  interest  to  see  how  the  holders  of  various 
securities  fared  in  some  of  the  reorganizations  of  1893  to  1898; 

1  Daggett,  Railroad  Reorganization,  p.  363.  *  Ibid.,  p.  357. 

'  Ibid.,  p.  370.  *  Daggett,  p.  373. 


STEAM-RAILROAD  BONDS  1 87 

in  other  words,  to  find  out  what  the  various  bondholders  and 
stockholders  received   for  their  old  securities   and   „,^  ^ 

What  secunty- 

what  contribution  they  had  to  make  toward  new  holders  re- 
capital.  The  accompanying  tables  on  pages  188-191  reorganizations, 
show  new  securities  issued  in  exchange  for  old  secu-  ^  ^^~^^ 
rities  and  assessments  in  these  four  reorganizations:  Atchison, 
Topeka  &  Santa  Fe,  according  to  plan  dated  March  14,  1895; 
Union  Pacific,  according  to  plan  dated  October  15,  1895;  North- 
ern Pacific,  according  to  plan  published  March  16,  1896;  Balti- 
more &  Ohio,  according  to  plan  dated  June  22,  1898. 

It  is  to  be  noted  that  in  the  Atchison  reorganization,  there  was 
a  liberal  scaling-down  of  the  principal  of  the  debt  by  using  to  a 
considerable  extent  new  preferred  stock;  that  in  the   „ 

TT    .        x^      .  r  .        .  •      •      1      r    1  Summary  of 

Umon  Pacific  reorgamzation,  the  pnncipal  of  the  old  these  reor- 
bonds  was  scaled  down  somewhat,  but  the  chief  ^^^^  ^°^ 
feature  was  a  reduction  in  interest  for  the  new  bonds  as  well  as 
a  considerable  use  of  preferred  stock;  that  in  the  cases  of  the 
Northern  Pacific  and  Baltimore  &  Ohio,  the  reorganizations  were 
effected  to  a  large  extent  through  a  reduction  in  interest  for  the 
new  bonds  as  compared  with  the  old,  rather  than  through  a  reduc- 
tion in  principal,  and  that  in  both  cases  preferred  stock  was  used 
to  a  considerable  extent. 

One  thing  more  needs  to  be  noted  about  these  reorganizations. 
In  the  three  cases  where  the  roads  were  reorganized  after  sale  at 
foreclosure,  —  namely,  Atchison,  Union  Pacific,  and   Foreclosure 
Northern  Pacific,  —  the  price  obtained  in  each  case   p^ce  does 

*•  not  necessanly 

at  foreclosure  sale  was  very  much  less  than  the  par   bear  close  reia- 
value  of  the  old  debt;  for  instance,  the  property  and   to  the  value  of 
franchises  of  the  Atchison,  Topeka  &  Santa  Fe  Rail-   *^'  p'^p""^^ 
road  were  sold  at  foreclosure  for  $60,000,000,^  as  against  a  prin- 
cipal of  the  old  debt  before  reorganization  of  $233,595,248; ^  the 
old  Union  Pacific  Railway  main  line  and  securities  involved  pay- 
ments of  $85,677,224,  as  against  total  debt,  including  debt  to  the 
United  States  Government,  October  i,  1895,  of  $111,070,224;^  the 

^  Commercial  and  Financial  Chronicle,  vol.  61,  p.  1063. 

^  Ibid.,  vol.  60,  p.  659. 

'  Annual  Report  Commissioner  of  Railroads  (Washington,  1898),  p.  9;  Commercial 
and  Financial  Chronicle,  vol.  61,  p.  705;  vol.  65,  p.  870.  Of  the  total  debt  of  the  Union 
Pacific  as  given,  $53>o39,Si2  represented  debt  to  the  United  States  Government. 


1 88      AJVIERICAN  AND  FOREIGN  INVESTMENT  BONDS 


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192      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Northern  Pacific  Railroad  and  lands  were  bought  in  f  or  $i  5 ,938,200,* 
as  against  total  debt  of  the  company,  June  30,  1896,  of  $132,376,- 
500.2  'p]^g  purpose  of  these  figures  is  to  show  that  the  foreclosure 
price  bears  no  necessary  relation  to  the  debt  or  to  the  value  of  the 
property.  In  all  such  cases,  the  bids  at  foreclosure  are  made  on 
the  basis  of  what  bid  is  necessary  in  order  to  get  the  property  and  be 
in  a  position  to  dictate  the  reorganization.  Minority  bondholders, 
however,  or  those  who  do  not  assent  to  the  plan  of  reorganization, 
must  take  in  satisfaction  of  their  old  claim  a  pro  rata  of  the  fore- 
closure price;  that  is,  if  properties  are  sold  for  $60,000,000,  for 
instance,  which  have  bonds  outstanding  of  $120,000,000,  the  non- 
assenting  bondholders  receive  only  fifty  cents  on  the  dollar  less 
expenses.  On  the  other  hand,  if  they  go  into  the  reorganization, 
they  get  the  new  securities  as  arranged  for  by  the  plan. 

In  reorganizations  the  apportionment  of  new  securities  usually 
is  on  the  basis  of  the  degree  of  safety  of  the  old  securities,  and  also 
Factors  deter-  Very  largely  on  the  basis  of  what  class  of  new  security- 
portionment^S  holdcrs  furnish  the  bulk  of  the  new  money  necessary 
new  securities  j-Q  put  the  property  into  satisfactory  condition.  In 
other  words,  if  interests  representing  the  old  common  stock  fur- 
nish most  of  the  new  money,  the  old  common  stock  gets  bet- 
ter treatment  than  it  otherwise  would.  Just  as  the  old  common 
stockholders  probably  have  suffered  most  through  the  difiicul- 
ties  of  their  road,  so  in  a  successful  reorganization,  if  they  pay 
their  assessments,  they  are  placed  in  a  position  to  profit  most.^ 

As  has  been  stated  earlier  in  this  chapter,  many  underlying 

issues  of  bonds  have  not  been  disturbed  at  all  in  reorganizations, 

and  have  received  their  interest  right  along.    Even 

value  of  securi-    bouds  that  wcre  disturbed  received  an  assortment 

tics  received  in  « 

certain  re-  of  new  sccuntics,  which  if  held  for  a  reasonable  time 

organizations  attained  a  market  value  that  satisfied  and  usually 
much  more  than  satisfied  the  entire  claim  of  the  old  bondholders. 
We  give  herewith  on  page  193  a  table  showing  the  market  value 

^  Commercial  and  Financial  Chronicle,  vol.  63,  p.  189,  and  Daggett,  p.  308. 

*  Interstate  Commerce  Commission,  Statistics  of  Railways  (Washington,  1897), 
P-  336. 

'  Very  often  a  large  part  of  the  common  stock  of  the  new  company  gets  into  the 
hands  of  bankers,  who  hold  the  stock  until  the  road  is  at  least  on  its  feet.  Sometimes 
bankers  control  the  reorganized  road  through  a  voting  trust  for  a  certain  period. 


STEAM-RAILROAD  BONDS 


193 


in  January,  1901,  November,  1907,  and  January,  191 2,  of  new 
securities  received  in  exchange  for  some  of  the  leading  classes  of 
old  securities,  according  to  the  four  reorganization  plans  we  have 

MARKET  VALUE  OF  NEW  SECURITIES  (LESS  ASSESSMENTS) 
RECEIVED  IN  REORGANIZATION  IN  EXCHANGE  FOR 
EACH  $1000  LEADING  OLD  SECURITIES  ^ 


Old  securities 


Atchison,  Topcka  6*  Santa  Fe  Railroad. 

General  mortgage  4%  bonds 

Second  mortgage,  class  A  bonds 

Second  mortgage,  class  B  bonds 

Income  bonds  of  1889 

Capital  stock 

Union  Pacific  Railway. 

First  mortgage  6  %  bonds 

Sinking-fund  8%  bonds 

Middle  Division  6%  bonds 

Denver  Extension  first  mortgage  6%  bonds.  . . 
Kansas  Pacific  consolidated  first  mortgage  6% 

bonds  

Capital  stock 

Northern  Pacific  Railroad. 

General  first  mortgage  6%  bonds 

General  second  mortgage  6%  bonds 

General  third  mortgage  6%  bonds 

Consolidated  mortgage  5%  bonds 

Collateral  trust  6%  notes 

Preferred  stock 

Common  stock 

Baltimore  &°  Ohio  Railroad. 
Baltimore  &  Ohio  consolidated  mortgage  of 

1887  5%  bonds 

Baltimore  &  Ohio  sterling  loan  of  1872  6% 

bonds 

Baltimore  &  Ohio  sterling  loan  of  1874  6% 

bonds 

Baltimore  &  Ohio  loan  of  1885  5%  bonds .  .  .  . 

Philadelphia  Division  45%  bonds , 

BjJtimore  &  Ohio  Terminal  bonds  of  1894  45% 
Baltimore  &  Ohio  Stock  —  first  preferred  ... 
second  preferred . 
common 


January 
4,  1901 


November 
I,  1907 


51109.14 
938.86 
982.18 
938.86 
431-63 


1467.17 
1614.44 
1467.17 
1467.17 

1432.71 
755-88 


1413.68 
1667.77 
1266.45 
1004.75 
1217.92 
730.00 
656.25 


1199.39 
1127.71 

1229. II 

1164-33 
1224.85 
1000.92 
1236.75 

1195-25 
786.50 


$968.25 
909.20 
951.20 
909.20 
720.25 


1321.67 
1491.25 
1321.67 
1321.67 

1340.84 
1053-75 


1271.25 
1615.88 

1293-95 

1070.55 

1141.67 

932.50 

915.00 


1091.27 

1026.90 

1116.90 

1058.85 

1082.92 

884.17 

977-50 

1157-50 

755-00 


January 
5,  1912 


51108.88 
1108.36 
1159.18 
1108.36 
1059-13 


1467.50 
1675.63 
1467.50 
1467.50 

1515-75 
1688.00 


1348-31 
1683.52 

1323-58 
1087.18 
1198.7s 
989-38 
1028.7s 


1162.84 

1090.33 

1197-13 
1130.25 

1215-8S 

980.00 

1225.38 

1534-25 
1015.50 


'  The  prices  for  market  value  are  taken  from  the  Commercial  and  Financial  Chronicle,  vol.  72,  pp.  34, 
35.  36,  38,  3Q;  vol.  8s,  pp.  1126,  1128,  1130, 1131;  vol.  94,  pp.  SS,  57.  59.  60. 


194     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

given.  It  can  be  seen  from  this  table  that  old  bondholders  and 
even  old  stockholders  ultimately  had  a  chance  to  recoup  at  least 
a  large  part  of  their  losses  and  sometimes  came  out  much  better 
than  this. 

In  spite  of  the  difficulties  under  which  our  railroads  have  been 
.  operated  and  all  the  troubles  through  which  they  have 

American  rail-  goue,  railway  transportation  in  the  United  States  has 
with\hose^^  ^  been,  on  the  whole,  remarkably  efficient.  The  accom- 
of  Europe  panying  figures  for  railways  in  the  United  States 

compared  with  railways  in  Great  Britain  and  Ireland,  France, 
and  Germany  may  be  of  interest. 


AMERICAN  AND  EUROPEAN  RAILWAYS  COMPARED 


Country 

Capitalization 
per  mile  of 
line,  1912  * 

Miles  of  line 

per  10,000 

inhabitants, 

1912  \ 

Average  re- 
ceipts per  pas- 
senger per 
mile,  1 912 1 
(cents) 

Average  re- 
ceipts per  ton 
per  mile, 

1912X 

(cents) 

United  States 

$63,535 
273,360 
147,787 
115,454 

25-93 
5-13 
6.36 
5-68 

1.987 

i-75o§ 

1.070 

.901 

■  744 

United  Kingdom 

France  (191 i) 

Germany 

2.000** 

I- 175 
1. 179      -. 

*  Interstate  Commerce  Commission,  Annual  Report  on  the  Statistics  of  Railways  in  the  United  States 
(Washington,  1914),  p.  32;  Interstate  Commerce  Commission,  Twenty-fifth  Annual  Report,  Railway  Re- 
turns; Returns  of  the  Capital,  Traffic,  Receipts,  and  Working  Expenditures  of  the  Railway  Companies  of 
the  United  Kingdom  for  the  year  IQ12  (London,  1913),  pp.  xvii  and  xx;  Statistical  Abstract  for  the  Principal 
and  Other  Foreign  Countries  (London,  1914),  pp.  387,  390. 

t  Interstate  Commerce  Commission,  Statistics  of  Railways  in  the  United  Stales  (1914),  p.  11;  Railway 
Returns  of  the  United  Kingdom,  p.  xvii  ;  Statistical  Abstract  for  the  Principal  and  Other  Foreign  Countries 
(1914),  pp.  13,  387,  390,  407. 

t  Interstate  Commerce  Commission,  Statistics  of  Railways  in  the  United  States  (1914),  p.  42;  Statistical 
Abstract  for  the  Principal  and  Other  Foreign  Countries  (1914),  pp.  387,  390. 

§  Approximate.     See  Dunn,  Government  Ownership  of  Railways,  p.  291. 

**  Approximate.  Includes  collection  and  delivery.  Raper,  Railway  Transportation,  p.  242.  Dunn,  p.  291, 
gives  the  same  figure.  See  also  Annual  Railway  Reports,  French  Ministry  of  Public  Works,  and 
Archiv  fiir  Eisenhahnwesen.  See  also  Bureau  of  Railway  Economics,  Comparative  Railway  Statistics  United 
States  and  Foreign  Couniries  (1912),  consecutive  no.  83  (Washington  D.C.,  i9is)- 

A  glance  at  the  figures  in  the  above  table  shows  that  the 
railways  of  the  United  States  have  by  far  a  smaller  capitaliza- 
tion per  mile  of  line  than  the  railways  of  the  United  Kingdom, 
France,  or  Germany.'  They  receive,  with  the  possible  exception  of 
the  railways  in  Great  Britain,^  a  larger  average  fare  per  passenger 

1  The  cost  of  construction  in  densely  populated  Europe  is,  of  course,  far 
greater. 

2  Actual  average  passenger  rates  not  known. 


STEAM-RAILROAD  BONDS  1 95 

per  mile.  This  is  owing  partly  to  the  use  of  second-class  and 
third-class  service  to  a  great  extent  in  Europe.  For  freight  service, 
however,  the  railways  of  the  United  States  receive  a  rate  per  ton 
per  mile  not  much  over  one  third  that  received  by  the  railways 
of  Great  Britain  and  Ireland  and  not  quite  two  thirds  that  re- 
ceived by  the  railways  of  France  and  Germany.  Furthermore, 
wages  on  the  American  railways  have  been  substantially  higher 
than  anywhere  in  Europe.^ 

In  discussing  various  phases  of  the  railroad  situation,  we  have 
strayed,  perhaps,  somewhat  from  our  special  subject 
of  railroad  bonds.  We  beUeve,  however,  that  all  the   discussed  above 
questions  discussed  above  have  a  more  or  less  direct   on^safety'of^ 
and  important  bearing  on  the  safety  of  such  bonds.    '"'''''°^'^  ''°°'^' 

In  general,  railroad  bonds  are  dependent  for  their  safety  mainly 
on  the  relation  of  the  total  debt  to  the  value  of  the   Leading  factors 
property  and  on  the  relation  of  net  earnings  to  fixed   °^  ^^^^^y 
charges. 

The  territory  served  by  any  given  road,  the  density  of  the 
freight  and  passenger  business,  and  the  future  growth  of  the  ter- 
ritory, as  well  as  the  physical  condition  and  operating 
efficiency  of  the  road  and  its  ability  to  withstand 
competition  or  proper  regulation,  all  are  highly  important.^ 

A  first-mortgage  bond  on  a  first-class  road  is,  as  a  rule,  the  best 
kind  of  security  obtainable.  Such  an  issue  is  the  Chicago,  Burling- 
ton &  Quincy  Railroad  (IlHnois  Division)  3^%  and 
4%  issue,  due  July  i,  1949.    These  bonds  are  the   strong  raii- 
obhgation  of  a  company  which  has  never  defaulted 
on  principal  or  interest  of  any  of  its  obhgations,  and  which  has 
paid  good  dividends  through  a  long  series  of  years,  including 
some  of  the  most  serious  depressions  ever  experienced  in  this  coun- 
try.  The  bonds  are  part  of  what  is  now  a  closed  first  mortgage 
on  the  valuable  terminal  property  of  the  company  in  the  city  of 
Chicago,  on  practically  all  the  mileage  in  the  State  of  Illinois, 
and  on  the  hne  running  from  Chicago  to  St.  Paul,  Minnesota. 

^  Raper,  Railway  Transportation,  p.  190. 

*  If  the  bonds  are  secured  on  a  portion  of  the  road,  the  question  always  should  be 
considered  as  to  whether  this  piece  of  road  could  be  operated  successfully  as  an  inde- 
pendent property. 


196      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

They  are  followed  by  $64,247,000  general  mortgage  4%  bonds 
and  by  $215,227,000  "joint"  bonds  issued  against  the  stock  of 
the  company.  Other  especially  strong  mortgage  issues  are  New 
York  Central  &  Hudson  River  Railroad  3!%,  1997;  Pennsylvania 
Railroad  4%,  1943  and  1948,  and  4|%,  i960;  Lake  Shore  &  Michi- 
gan Southern  Railway  3!%,  1997;  Chicago,  Milwaukee  &  St.  Paul 
Railway  general  mortgage  3^%,  4%,  42  %,  1989;  Chicago  &  North- 
western Railway  general  mortgage  4%  and  5%,  1987;  and  Illinois 
Central  main  Hne  4%,  1951.  Many  other  exceedingly  well-secured 
issues  could  be  given  in  a  longer  hst. 

In  the  matter  of  the  prices  of  railroad  bonds,  we  find,  in  com- 
paring the  prices  of  1902,  for  instance,  with  those  of  191 2,  a  decline 
Prices  of  ill  price  or  increase  in  net  income  similar  to  what  we 

railroad  bonds  have  f  ound  in  the  cases  of  state  and  municipal  bonds. 
The  accompanying  table  illustrates  this  point. 


Bonds 


Atchison,  Topeka  &  Santa  Fe,  general  4%,  1995 

Baltimore  &  Ohio,  prior  lien  3§%,  1925 

Chicago,  BurUngton  &  Quincy  Railroad  (Illinois  Division),  3!% 

1949  ••  ••. 

Chicago,  Milwaukee  &  St.  Paul  Railway,  general  4%,  1989 

Chicago  &  Northwestern  Railway,  general  35%,  1987 

lUinois  Central  Railroad,  first  mortgage,  4%,  195 1 

New  York  Central  &  Hudson  River  Railroad,  3^%,  1997 

Northern  Pacific  Railroad,  prior  lien  4%,  1997 

Pennsylvania  Railroad  first  real  estate  4%,  1923 

Union  Pacific  Railroad  land  grant  4%,  1947 


Prices 


igo2* 

igi2^ 

3-90% 

4.04% 

3.85 

4- 30 

3-43 

4- 15 

3.10 

4-05 

3-25 

4. 10 

3.38 

3- 90 

3-25 

4.00 

3.85 

4-05 

3-45 

3-85 

3-75 

3-95 

•  Prices  January  3,  1902.   See  Quotation  Supplement,  Commercial  and  Financial  Chronicle,  February 
8,  1902,  pp.  23,  24,  27,  28,  30;  Commercial  and  Financial  Chronicle,  vol.  74,  pp.  33-36. 

t  Prices  January  s,  1912.  See  Commercial  and  Financial  Chronicle,  January  6,  1912,  vol.  94,  pp.  SS-60. 

The  lowest  average  prices  of  railroad  bonds  recorded  during  the 
past  fifteen  years  occurred  in  the  fall  of  1907  and  in  the  summer 
and  early  autumn  of  1915.  As  showing  the  effect  of  the  war,  the 
average  price  of  twelve  issues  of  railroad  bonds  hsted  on  the  New 
York  Stock  Exchange  showed  a  net  decline  between  July,  1914, 
and  July,  1915,  from  90.9  to  87.7,  or  3.2  points.^ 

In  closing  this  chapter  on  railroad  bonds,  we  will  say  that  the 
^  Babson's  Desk  Sheet  of  Tables  and  Charts,  July  29,  1915. 


STEAM-RAILROAD  BONDS  1 97 

railroad  industry  in  the  United  States  is  substantially  equal  in 
magnitude  to  all  the  manufacturing  industries  and  is 
exceeded  to  any  extent  only  by  farming.  ^  The  mileage   of  railroad 
is  over  one  third  the  total  mileage  of  the  world.  The   ^'^  ^^^^ 
industry  has,  as  stated  earHer  in  this   chapter,  over  1,800,000 
employees, 2  which,  on  the  usual  basis  of  figuring  five  in  a  family, 
involves  the  well-being  of  about  9,000,000  people.   According  to 
the  figures  of  the  Interstate  Commerce  Commission  for  the  year 
ending  June  30,  1913,  the  net  capitalization  of  all  the  railroads  in 
the  United  States  is  $15,330,131,446,  and  the  gross  capitalization 
$19,796,125,712.3 

On  the  whole,  the  service  which  the  American  railroads  have 
given  to  the  country  has  been  not  only  efiicient,  but  absolutely 
necessary  for  the  development  and  even  the  existence   ^ 

.    ,  -TO  rr^i  •  -1  Importance  of 

01  the  Umted  States  as  one  country.  This  service  has   service  per- 
established  free  communication  and  made  possible   theTmencan 
free  interchange  of  commodities  over  a  vast  territory,    '^^'^'^^^'^^ 
and  has  brought  into  being  thickly  populated  communities  which 
otherwise  probably  never  would  have  come  into  existence.   Fur- 
thermore, the  railroads  have  performed  this  immense  service  on 
the  basis  of  an  exceedingly  moderate  capitahzation  compared  with 
capitaHzation  in  other  important  civilized  countries.    They  have 
paid  higher  wages  to  their  employees  and  have  given  freight  ser- 
vice at  very  much  lower  figures  per  ton  per  mile  than   Railroads 
the  railroad  systems  of  Europe.  -ert^to  kderai' 

This  great  industry  certainly  is  entitled  to  receive   regulation  but 

1-1         Ml  1  Ml/-/-.  •        .  ^""^  entitled  to 

rates  which  will  make  possible  eincient  service  m  the   rates  which 
present  and  future  growth  to  correspond  with  the   good^en^ice 
growth  of  the  country.    It  should  be  subject,  in  our    rettr^n^t'o'^ 
opinion,  to  federal  regulation  in  such  a  way  as  to   '^^estors 
safeguard  the  interests  of  the  public  and  of  investors.    In  the 
broadest  sense,  the  general  prosperity  of  the  country  and  of  the 
railroad  industry  are  essential  to  the  safety  of  railroad  bonds. 

^  See  Bureau  of  Railway  Economics,  Bulletin  no.  39,  Comparison  of  Capital  Values 
—  Agriculture,  Manufactures,  and  the  Railways  (Washington,  191 2),  p.  14. 

2  Interstate  Commerce  Commission,  Twenty-sixth  Annual  Report,  Statistics  of 
Railways  in  the  United  States  (Washington,  1914),  p.  23. 

^  Ibid.,  pp.  28  and  30. 


CHAPTER  VI 

PUBLIC-SERVICE   COEPORATION  BONDS 

If  we  exclude  steam-railroad  bonds,  which  we  have  discussed  in 
Principal  the  previous  chapter,  public-service  corporation  bonds 

Hc-se^vke^cor-     ^^Y  t>e  issucd  by  the  following  principal  classes  of 
poration  bonds     corporations :  — 
(i)  Electric  railways. 

(2)  Gas  companies. 

(3)  Electric  hght  and  power  companies. 

(4)  Telephone  companies.^ 

We  will  use  the  term  "public-service  corporation  bonds"  in  the 
rest  of  this  chapter  as  referring  only  to  the  above  classes  of  bonds. 

The  above  classes  may  be  subdivided;  for  instance,  there  are 
city  street  railways  and  interurban  railways;  there  are  gas  com- 
^  , ,.        .         panics  which  do  principally  a  lighting  business  and 

Pubbc-service        ^  .  .      .      , ,       ^        ,  . 

corporations  Companies  which  furnish  gas  prmcipally  for  heatmg 
ouTkinds^of  or  cooking;  there  are  electric  light  and  power  com- 
business  panies  which  develop  their  power  principally  from 

steam  and  others  which  develop  their  power  principally  from 
water  power;  and  there  are  electric  light  and  power  companies 
whose  principal  business  is  that  of  furnishing  light  and  others 
whose  principal  business  is  furnishing  power  to  industries.  There 
are  often,  moreover,  corporations  which  do  both  a  street-railway 
and  an  electric  light  and  power  business,  or  a  gas  business  and  an 
Prices  of  some     clcctric  light  and  power  business,  or  all  three  com- 

leading  public-       U]j.pA  2 
service  corpo-         uiiicu. 

ration  bonds  \Yg  gjyg  ^giow  priccs  on  an  iucome  basis  of  certain 

^  Years  ago  there  were  a  good  many  private  water  companies  serving  local  com- 
munities, but  most  of  these  have  since  been  taken  over  by  municipalities  for  mimicipal 
ownership  and  operation. 

2  Of  recent  years,  there  has  been  a  large  development  of  the  holding  company  as  a 
vehicle  for  controlling  public-service  corporations,  often  of  various  kinds  and  some- 
times located  in  different  States.  (See  The  North  American  Company,  Public  Service 
Corporation  of  New  Jersey,  The  United  Gas  Improvement  Company.) 


PUBLIC-SERVICE  CORPORATION  BONDS  1 99 

well-known  public-service   corporation  bonds  in  April  to  July, 
1914:^ 

Laclede  Gas  Light  (St.  Louis)  first-mortgage  5%  1919.  .4.66% 

New  York  Telephone  4^%  1939 4.68% 

Detroit  Edison  first-mortgage  5%  1933 4-77% 

Cleveland  Railway  5%  1931 4-83% 

Commonwealth  Edison  (Chicago)  5%  1943 4.86% 

Seattle  Electric  5%  1930 4-87% 

Union  Electric  Light  and  Power  (St.  Louis)  5%  1932 . .  .4-88% 

Southern  Power  5%  1930 4-95% 

Boston  Elevated  Railway  5%  1942 5-oo% 

American  Telephone  &  Telegraph  4%  1929 5-oo% 

Interborough  Rapid  Transit  (New  York)  5%  1966.  .  .  .5.08% 

These  are  fairly  representative  of  the  best  grade  of  public- 
service  corporation  bonds. 

A  brief  sketch  of  the  origin  and  development  of  the  business 
now  done  by  public-service  corporations  may  be  of  interest.  The 
earhest  developments  in  this  field  were  in  gas-Ughting.  origin  and 
In  1792,  one  William  Murdock  Ughted  with  gas  his  ^UcSce''^ 
house  and  ofiice  in  Cornwall,  England.  Li  1813,  gas  business— gas 
was  used  to  light  Westminster  Bridge;  and  in  18 16,  it  became 
common  in  London.  The  first  city  in  the  United  States  to  install  a 
system  of  gas-Hghting  was  Baltimore,  in  181 7.  Since  that  time  the 
growth  of  the  gas  business  has  been  uninterrupted.^  We  give  on 
page  200  a  table  showing  quantity  of  gas  made,  capital,  and  num- 
ber of  employees  for  the  gas  business  in  the  United  States  at  periods 
from  1859  to  1909  inclusive.  These  figures  show  a  steady  growth 
of  the  gas  business  in  the  United  States. 

The  first  street  raUway  in  the  United  States  was  built  in  New 
York  City  on  Fourth  Avenue  from  Prince  Street  to  Harlem  in 
1832.     Between  that  date  and  1873,  horse  railroads   street  and 
were  introduced  into  all  the  large  American  cities,    eiectnc  railways 
After  1 88 1,  electrical  construction  and  operation  was  used  to  a 

^  Prices  from  dealers'  offerings  April  to  July,  1914,  and  from  the  Boston,  New  York, 
and  Chicago  Stock  Exchanges  as  reported  in  the  Commercial  and  Financial  Chronicle, 
July  4,  1914,  pp.  32-39. 

^  For  above  material  see  Encyclopedia  Britannica  (nth  ed.,  Cambridge,  England, 
1910),  vol.  XI,  p.  483;  Chambers's  EncyclopcEdia  (London,  Edinburgh,  and  Philadel- 
phia, 1893),  vol.  5,  p.  103;  EncyclopcBdia  Americana  (New  York,  1904-05),  vol.  7, 
"Gas  Illumination,  History  of." 


200      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 
GAS  COMPANIES* 


Date 

Quantity  of  gas  made 
(cubic  feet) 

Capital 

Number  of  em- 
ployees 

■l2>KQ 

36,519,512,000 

67,093,553,000 

112,549,979,000 

150,83^,793,000 

$28,848,726 
71,773,694 

258,771,795 
567,000,506 
725,035,204 
915,536,762 

5,730  t 
8,72^  t 

1860 

i88q 

12,996  t 
28,363  t 
39,972  t 
50,730  t 

1800 

IQ04 

IQOQ 

*  Thirteenth  Census,  vol.  x,  p.  637. 

t  Average  number  of  wage-earners  only. 

t  Salaried  employees  and  average  number  of  wage-earners. 


considerable  extent,  and  at  the  close  of  1888  there  were  nearly 
one  hundred  and  fifty  miles  of  electric  line  in  operation.^  The  fol- 
lowing table  shows  the  miles  of  line  operated,  cost  of  construc- 
tion and  equipment,  and  number  of  employees  for  street  and 
electric  railways  in  the  United  States  at  periods  from  1890  to  191 2 
inclusive.  This  table  shows  a  rapid  growth  until  1907  and  a  mod- 
erate growth  after  that  date. 

STREET  AND   ELECTRIC  RAILWAYS* 


Date 

Miles  of  line 
operated 

Cost  of  construction 
and  equipment 

Number  of 
employees 

1890 

5,783 
16,645 

25,547 
30,437 

$389,357,289 
2,167,634,077 
3,637,668,708 
4,596,563,292 

70,764 
140,769 
221,429 
282,461 

IQ02 

IQ07 

IOI2 

•  Department  of  Commerce,  Bureau  of  the  Census,  Bulletin  124,  Central  Electric  Light  and  Power 
Stations  and  Street  and  Electric  Railways,  1912  (Washington,  igi4),  p.  64. 

The  first  really  successful  electric  arc  lamp  was  patented  in 
1857;  and  in  1858,  a  lamp  designed  by  Duboscq  was  used  to  show 
Electric  light  clectric  light  at  sea  from  the  South  Foreland  Light- 
and  power  housc  in  England.   From  1878  to  1879,  electric  arc 

lamps  were  used  widely  for  lighting  large  rooms,  streets,  and  spaces 

1  Encyclopcedia  Americana,  vol.  14,  "Street  Railway  Construction";  Chambers^ s 
Encyclopcedia,  vol.  4,  p.  285. 


PUBLIC-SERVICE  CORPORATION  BONDS 


20I 


out  of  doors.  In  1879,  Edison  invented  the  first  successful  incan- 
descent lamp;  and  from  that  time  the  growth  of  the  incandescent 
electric-hghting  industry  has  been  rapid.  ^  The  accompanying  table 
shows  total  horse  power,  cost  of  construction  and  equipment,  and 
number  of  employees  for  central  electric  stations  in  1902,  1907,  and 
191 2,  and  the  same  data  for  hydro-electric  stations  and  for  central 
electric  stations  and  hydro-electric  stations  combined  in  191 2,    , 

ELECTRIC   LIGHT   AND   POWER 


Date 

Total  horse  power 

Cost  of  construction 
and  equipment 

Number  of  employees 

Central  electric  sta- 
tions * 

1002 

1,845,048 
4,098,188 
7,528,648! 

3,179.244 
10,707,892 

$504,740,352 
$1,096,913,622 
$2,175,678,266! 

$922,954,341 
$3,098,632,607 

30,326 
47,632 
79,335 

17,160 
96,49s 

IQ07 

IQ12 

Hydro-electric    sta- 
tions] {Reporting 
water  -  power     oj 
1000  horse  power 
or  more) 

1912 

Total  central  electric 
stations  a^id  hydro- 
electric stations 
IQ12 

*  Bureau  of  the  Census,  Bulletin  124,  Central  Electric  Light  and  Power  Stations,  etc.,  pp.  14  and  15. 
t  Ibid.,  p.  21. 

These  tables  show  the  importance  and  rapid  growth  of  the 
electric  industry. 

Professor  Alexander  Graham  BeU,  on  February  14,  1876,  filed 
in  the  Patent  Ofiice  specifications  and  drawings  of  the  original 
Bell  telephone.  The  first  important  test  of  the  new 
invention  was  in  a  conversation  carried  on,  October 
9,  1876,  by  Professor  Bell  and  Thomas  A.  Watson  over  a  tele- 
graph line  between  Boston,  Massachusetts,  and  Cambridge, 
Massachusetts.^  The  table  on  page  202  shows  number  of  stations 

*  Chambers's  Encyclopcedia,  vol.  4,  pp.  281-82;  Encyclopedia  Americana,  vol.  6, 
"Electric  Lighting." 

^  Chambers's  Encyclopcedia,  vol.  10,  p.  no;  Herbert  N.  Casson,  The  History  of  the 
Telephone  (Chicago,  19 10),  p.  49  and  plate. 


Telephones 


202     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 
TELEPHONE  BUSINESS* 


Date 

Number  of  stations 
or  telephones 

Total  capitalization 
outstanding 

Number  of 
employees 

1880 

54,319 
233,678 

2,315,297 
4,906,693 
7,326,748 

$14,605,787 1 

72,341,736 
348,031,058 
758,122,214 
991,294,115 

^,^^8 

1890 

8,64"; 

IQ02 

78,752 

1907 

131,670 

1912 

18^,^61 

*  Department  of  Commerce  and  Labor,  Bureau  of  the  Census,  Telephones,  igi2  (Washington,  1915)1 
P-  13. 

t  Partial  figures. 

or  telephones,  total  capitalization  outstanding,  and  number  of 
employees  for  the  telephone  business  at  periods  from  1880  to  191 2 
inclusive.  These  figures  show  a  growth  almost  unbelievable.  It  is 
now  possible  to  talk  over  the  telephone  from  New  York  City  to 
San  Francisco. 
The  business  of  public-service  corporations,  with  the  possible 
exception  of  that  of  interurban  railways  and  of  that 

Points  of  .  r     1  1  •      1  •    1  1         •  1  •   1 

similarity  in       portiou  of  the  electric  hght  and  power  busmess  which 

different  classes  •■  n     i  •    j      .    •    i  i        •  .       .     .,        . 

may  be  called  mdustnal  power  busmess,  is  similar  m 
three  leading  respects :  — 

(i)  In  being  based  on  a  franchise  or  privilege  of  some  sort. 
'     (2)  In  being,  as  a  rule,  monopolistic. 

(3)  In  being  affected  to  a  comparatively  slight  extent  as  to  earn- 
ings by  general  businesss  expansion  or  depression. 

Some  of  these  conditions  are  inherent  in  the  nature  of  public- 
service  business  and  some  are  the  result  of  comparatively  recent 
developments. 

In  attempting  to  judge  the  safety  of  any  given  issue  of  public- 
service  corporation  bonds,  one  of  the  first  considerations  is  the  size 
and  character  of  the  community  served.  The  cities 
in  the  United  States  having  a  population  of  100,000 
or  over  naturally  furnish  the  best  field,  other  things 
being  equal,  for  the  development  of  street-railway  or 
retail  gas  and  electric  business.  In  the  same  way, 
those  of  our  States  having  a  large  population,  like  Massachusetts, 
New  York,  Ohio,  and  Illinois,  furnish  the  best  field  for  the  great 


Size  and  char- 
acter of  the 
community 
served  an 
important  fac- 
tor in  safety 


PUBLIC-SERVICE  CORPORATION  BONDS  203 

Bell  telephone  concerns.  The  character  of  the  population,  the  ex- 
tent and  diversity  of  their  interests,  and  their  attitude  toward 
public-service  corporations,  also  are  important. 

Another  leading  consideration  governing  the  safety  of  public- 
service  corporation  bonds,  and  perhaps  the  most  important  con- 
sideration of  all,  as  in  the  case  of  steam  railroads,  is  „   .    ,  , , 

,  ,      .  .     '  T     T» «-  Ratio  of  debt 

the  relation  of  debt  to  property  or  assets.  In  Massa-  to  assets  is 
chusetts,  the  ratio  of  debt  to  property  on  gas  and  ^^""^  ^° 
electric  light  companies  is  not  over  fifty  per  cent,^  that  is,  for  every 
issue  of  bonds  there  must  be  paid  in  at  least  an  equal  amount  of 
capital  stock  including  premiums. ^  Street  railways  in  Massachu- 
setts have  the  right  to  issue  bonds  to  an  amount  twenty  per  cent  in 
excess  of  the  amount  of  paid-in  capital  stock. ^  Outside  of  Massa- 
chusetts, it  is  more  common  to  find  public-service  corporations 
having  a  debt  from  seventy-five  to  ninety  per  cent  of  the  property 
or  asset  value. 

Many  considerations  may  modify  the  safety  or  lack  of  safety  of 
a  debt  representing  a  large  proportion  of  the  property  value;  for 
instance,  control  of  the  business  in  a  valuable  terri-   „  ,         ,. 

.  .    ,  .  Factors  modi- 

tory  on  the  basis  of  giving  good  service  at  low  rates,   fying  impor- 

.  ,.  .^         .  ^  ,        .  tance  of  ratio 

large  net  earmng  capacity,  diversincation  of  business,  between  debt 
strong  franchise  situation,  or  particularly  efificient  ^^  property 
management. 

As  stated  above,  almost  all  public-service  corporations,  using 
the  term  as  we  have  defined  it  in  this  chapter,  are  monopolistic  in 
their  character.    There  is,  as  a  rule,  only  one  street 
railway,  one  gas  company,  or  one  electric  light  and 
power  company  in  a  given  city  or  community.    In   toSi^hlvea 
earlier  days,  when  such  enterprises  were  in  their  in-  ^°?°g°i| '° 
fancy  and  when  the  relation  of  street  railways,  gas 
companies,  and  electric  light  and  power  companies  to  the  public 
had  hardly  been  thought  out,  even  in  its  broadest  lines,  there 
were  often  two  or  more  corporations  attempting  to  perform  the 
same  or  similar  service  in  one  community.    This  state  of  affairs 
was  paid  for,  as  it  always  is,  either  by  the  community  in  poorer 

^  In  some  cases,  as  in  that  of  the  Edison  Electric  Illuminating  Company  of  Boston, 
the  debt  compared  with  the  property  value  is  so  small  as  to  be  unimportant. 
^  Acts  igi4,  chap.  742,  sees.  38-40.  '  Ihid.,  chap.  671. 


Most  public 
service  cor- 


204     MIERICAN  AND  FOREIGN  INVESTMENT  BONDS 

service  or  higher  prices  or  else  by  security-holders  in  losses  on 
their  investment.  Gradually  consolidations  took  place  until  in 
most  communities  there  was  only  one  corporation  attempting  to 
perform  the  same  or  similar  service. 

As  soon  as  it  became  clear  to  the  public  that  duplication  of 
facilities  was  not  only  unnecessary,  but  involved  an  absolute  loss 
to  the  community  or  to  security-holders,  States  and 
^f^mo^poiy  municipalities,  in  giving  public-service  corporations 
fedTo'restHc-  ^^^  ^ight  to  do  busiucss,  imposcd  conditions  of  a  some- 
tions  on  private   what  different  and  of  a  much  more  stringent  character 

management  _        ..  .  .... 

than  before.  For  if  corporations  furmshmg  street- 
railway  service,  gas,  electric  light  and  power,  or  telephone  service 
—  essential  to  the  every-day  life  of  the  community  —  were  to 
have  a  monopoly  of  the  business,  they  should  be  compelled  to  give 
satisfactory  service  at  reasonable  rates. 

Publicly  granted  rights  to  operate  public  utilities  usually  are 
called  franchises.  All  franchises  come  from  the  State,  although  the 

legislature  may  and  often  does  delegate  to  municipal 

authorities  the  right  to  take  final  action  in  the  pro- 
cedure resulting  in  the  creation  of  a  franchise.^  Indiana  and  Cali- 
fornia may  be  mentioned  as  examples  of  States  where  the  power  to 
grant  franchises  is  exercised  indirectly  through  the  act  of  munici- 
palities to  which  the  State  has  delegated  its  power.-  Franchises 
give  public-service  corporations  the  right  to  operate  street-railway 
lines,  gas,  electric  light,  or  telephone  properties,  as  the  case  may  be, 
and  the  right  to  use  the  streets,  erect  poles  and  wires,  and  do  other 
things  necessary  to  carry  on  the  business  of  the  corporation.  Fran- 
chises generally  have  been  held  to  be  in  the  nature  of  contracts.^ 
Franchises  in  earlier  days  sometimes  contained  burdensome 

restrictions,  such  as  compelling  corporations  to  pave 
restrictions  in      an  uuusual   distance   outside    the   tracks,  place  an 

unreasonable  portion  of  their  wires  in  underground 

^  Skaneatcles  W.  W.  Company  v.  Skancateles,  i6i  N.Y.  154,  165,  per  Parker, 
Ch.  J.;  55  N.E.  562;  46  L.R.A.  687;  (on  appeal)  184  U.S.  354. 

^  Acts  igo5  (Indiana),  p.  383,  as  amended  by  Ads  igii,  p.  181  (Bums's  Annot.  Ind. 
Stats.  [1914],  vol.  4,  sec.  8930);  Constitution  of  California,  art.  xi,  sec.  ig. 

'  Minneapolis  v.  Minneapolis  St.  R.  Co.,  215  U.S.  417;  54  L.  Ed.  259;  Chicago 
Municipal  Gas  Light,  etc.,  Co.  v.  Lake,  130  111.  42;  22  N.E.  616.  For  collection  of 
authorities,  see  Public  Utilities,  by  0.  L.  Pond  (Indianapolis,  1913),  sec.  95,  note.    ' 


PUBLIC-SERVICE  CORPORATION  BONDS  205 

conduits,  or  charge  a  rate  incompatible  with  a  fair  return  to  secur- 
ity-holders. 

Many  franchises,  and  until  recently  most  franchises,  have  been 
granted  for  a  definite  term  of  years,  running  usually  from  twenty 
to  fifty  years.    Some  franchises  have  been  considered   Length  of 
by  the  corporations  and  some  held  even  by  the  courts   franchises 
as  perpetual.^ 

Street-railway  franchises  and  possibly  gas  and  electric  light 
franchises  in  Massachusetts  ^  are  revocable  Hcenses,   Revocable 
or  simply  rights  to  operate  during  good  behavior.   inirtmiSiiate 
In  Wisconsin,^  all  franchises,  and  in  Indiana,^  many  Permits 
franchises  are  what  may  be  called  indeterminate  permits. 

In  most  States,  a  corporation  must  obtain  the  consent  of  the 
local  authorities  to  the  location  of  tracks,  conduits,    consent  of  local 
poles  and  wires,  and  other  portions  of  its  plant  which   fnsuu"tion*of 
may  interfere  with  the  public  use  of  the  streets.  property 

In  the  slow  improvement  of  the  franchise  situation  which  has 
been  going  on  for  many  years,  irregularities  and  mismanagement 
of  those  in  control  of  pubUc-service  corporations,  just   p.„    . . 
as  in  the  case  of  steam  railroads,  combined  with  a  lack   arriving  at  a 
of  clear  or  of  any  ideas  on  the  part  of  the  public  as  to   franchise 
the  principles  involved,  have  led  to  many  difficulties   ^"^^'^'"'^ 
in  bringing  about  even  a  reasonable  working  solution  of  this  impor- 
tant problem. 

In  the  opinion  of  the  most  enlightened  public-service  corporation 

^  See  Louisville  v.  Cumberland  Valley  Telephone  Co.,  224  U.S.  649  (holding  the 
franchise  of  the  Ohio  Valley  Telephone  Company  in  the  city  of  Louisville  to  be  per- 
petual); per  Lamar,  J.,  at  664.  "The  earlier  cases  are  reviewed  in  Detroit  St.  R.R.  v. 
Detroit,  64  Fed.  Rep.  628,  634,  which  was  cited  with  approval  in  Detroit  v.  Detroit  St. 
R.R.,  184  U.S.  368,  395,  this  court  there  saying  that  'Where  the  grant  to  a  corporation 
of  a  franchise  to  construct  and  operate  its  road  is  not,  by  its  terms,  limited  and 
revocable,  the  grant  is  in  fee.'" 

2  As  to  revocation  of  street-railway  locations,  see  Acts  igo6,  chap.  463,  part  3,  sec. 
66;  Acts  igog,  chap.  417,  sec.  6;  Medford  &  Charlestown  St.  R.R.  Co.  v.  Somervalle  & 
Middlesex  R.R.  Co.,  iii  Mass.  232.  As  to  gas  and  electric  light  locations,  see  Boston 
Electric  Light  Co.  v.  Boston  Terminal  Co.,  184  Mass.  566;  Natick  Gas  Light  Co.  v. 
Natick,  175  Mass.  246-52. 

^  Laws  igo7,  chap.  499,  as  amended;  see  Wis.  Slats,  igii,  chap.  87,  sec.  1797M-74; 
Laws  igij,  chap.  610. 

"•  The  Indiana  law  leaves  the  acceptance  of  an  indeterminate  permit  optional  with 
the  utility  and  fixes  a  limited  period  within  which  to  make  the  change.  {Laws  of 
Indiana,  igij,  chap.  76,  sec.  loi.) 


206      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

managers  to-day,  as  well  as  in  the  opinion  of  publicists,  the  best 
Best  sort  of  sort  of  franchise  is  one  that  is  fair  and  reasonable 
franchise  j^^^]^  |-q  |-]^g  community  scrvcd  and  to  the  corporation. 

As  exceedingly  interesting  franchise  arrangements  of  a  more 
or  less  special  character  and  yet  embodying    the 
franchise  principle  of  fair  dealing  between  the  community  served 

arrangemen  s  ^^^  ^^^  corporation,  wc  wish  to  Call  attention  to  the 
following: 

(i)  The  Boston  Sliding  Scale  Act,^  which  established  for  a  ten-year 
period  from  June  30, 1906,  the  relations  in  certain  respects  between 
the  Boston  Consohdated  Gas  Company  and  the  community 
served.  This  act,  passed  after  a  valuation  of  the  properties  under 
the  direction  of  the  Massachusetts  Gas  and  Electric  Light  Com- 
missioners, provided  for  a  standard  price  for  gas  of  ninety  cents 
per  one  thousand  cubic  feet  and  a  standard  rate  of  dividends  on 
the  capital  stock  of  7%  per  annum.  It  provided  further,  that  for 
every  one-cent  reduction  in  the  price  of  gas  below  the  standard 
price,  the  company  might  increase  its  dividend  one-fifth  of  1%.^ 

(2)  Franchises  of  the  Chicago  City  Railway  Company  and  the 
Chicago  Railways  Company  granted  by  an  ordinance  ^  passed 
February  4,  1907,  and  approved  at  popular  election  April  2,  1907. 
These  franchises  fixed  valuations  for  municipal  purchase  and  pro- 
vided for  a  distribution  in  cash  of  the  surplus  earnings  on  a  five- 
cent  fare  basis  between  the  city  of  Chicago  and  the  companies. 

(3)  Franchise  of  the  Cleveland  Railway  Company  granted  by  an 
ordinance  ^  passed  by  the  City  Council  and  approved  by  the 
Mayor,  December  18,  1909,  and  ratified  by  the  voters  of  the  city 

*  Acts  1906,  chap.  422. 

2  The  Boston  SUding  Scale  Act  has  been  followed  by  general  legislation  embodying 
substantially  the  same  principles  in  the  following  States:  New  York,  Pennsylvania, 
Maryland,  Ohio,  Wisconsin,  Missouri,  Idaho,  Arizona,  and  Cahfornia.  New  York: 
Laws  1910,  chap.  480,  sec.  65(4);  Birdseye,  etc..  Cons.  Laws,  vol.  8,  p.  2200,  chap.  48, 
sec.  65(4),  in  effect  June  14,  1910;  Pennsylvania:  Laws  1913,  no.  854,  art.  3,  sec.  i(a), 
in  effect  January  i,  1914;  Maryland:  Laws  1910,  chap.  180,  sec.  31^,  p.  375,  in  effect 
April  5,  iQio;  Ohio:  Laws  1911,  p.  554,  House  Bill  no.  325,  sec.  xg,  in  effect  June  30, 
1911;  Wisconsin:  Laws,  7907, chap.  499,  in  effect  July  11,  1907;  Wisconsin  Stats. 
(1911),  sec.  1797M-17;  Missouri:  Laws  1913,  p.  603,  Senate  Bill  no.  i,  sec.  68(4), 
in  effect  April  15,  1913;  Idaho:  Session  Laws  191 3,  cha.^.  61,  sec.  20,  in  effect  May  7, 
1913;  Arizona:  Laws  jp72,  chap.  90,  sec.  21,  Rev.  Stats.  1913,  sec.  2297;  CaUfomia: 
Stats.  1911,  Extra.  Session,  chap.  14,  sees.  20-21,  in  effect  March  23,  1912. 

'  Council  Proceedings  (Chicago,  111.,  1906-07),  pp.  2944-90. 

*  Ordinance  no.  16238A,  entitled  "An  ordinance  granting  renewal  of  the  street- 
railway  grants  of  the  Cleveland  Railway  Company,"  as  amended  by  Ordinance  no. 
20890B,  passed  July  10,  1911. 


PUBLIC-SERVICE  CORPORATION  BONDS  207 

at  a  referendum  election,  February  17,  1910.  This  franchise, 
granted  after  a  valuation  of  the  company's  property  made  by  a 
court,  provided  for  municipal  purchase  under  certain  conditions 
and  for  a  fare  which  would  take  care  of  operating  expenses  and 
maintenance,  interest  on  the  debt,  and  6%  on  the  valuation  as 
represented  by  the  capital  stock. 
(4)  Agreement  ^  between  the  City  of  New  York  and  the  Interborough 
Rapid  Transit  Company  for  building  the  new  subways.  This 
agreement  provided  that  the  new  subways  should  be  owned  by 
the  City  of  New  York,  and  operated  by  the  company,  that  part  of 
the  cost  of  construction  should  be  paid  by  the  city  and  part  by 
the  Interborough  Rapid  Transit  Company;  and  that  the  company 
should  have  a  first  claim  on  the  earnings  to  an  amount  sufi&cient  to 
insure  a  satisfactory  return  on  its  investment. 

All  these  franchise  arrangements  show  an  adaptation  of  sound 
general  principles  to  peculiar  local  conditions.^ 

The  franchises  granted  in  Chicago  and  in  Cleveland  were  the 
result  of  independent  negotiations  between  the  cities  and  the  com- 
panies. They  were  made  effective  before  even  the   interborough 
existence  of  any  public-service  commissions  having   Rapid  Transit 

•^    '^  _  ^  <->    agreement 

jurisdiction.  The  Interborough  Rapid  Transit  agree-   made  effective 
ment,  on  the  other  hand,  while  the  result  of  nego-   Pubiic-Service 
tiations  between   the   City  of  New  York  and  the   Commission 
company,  was  made  effective  only  through  the  approval  of  the 
Public-Service  Commission,  First  District,  State  of    New  York. 
These  facts  suggest  how  recent  is  the  idea  of  control  of  local  public- 
service  corporations  by  state  commissions. 

To-day,  however,  not  only  the  franchise  question  in  its  narrow- 
est sense,  but  the  whole  question  of  the  relation  of  public-service 
corporations  to  the  communities  which  they  serve  centers  around 
regulation  by  state  commissions.    This  is  of  the  greatest  impor- 

^  City  of  New  York,  by  the  Public-Service  Commission,  First  District,  with  Inter- 
borough Rapid  Transit  Company,  Contract  no.  3,  dated  March  19,  1913;  the  City  of 
New  York,  by  the  PubHc-Service  Commission,  First  District,  with  Interborough 
Rapid  Transit  Company,  lessee  and  grantee,  supplementary  agreement  dated  March 
19,  1913;  Public-Service  Commission,  First  District,  to  Interborough  Rapid  Transit 
Company,  certificate  dated  March  19,  1913;  Public-Service  Commission,  First  Dis- 
trict, with  Manhattan  Railway  Company,  certificate  dated  March  19,  1913. 

2  For  an  interesting,  but  not,  as  it  seems  to  us,  entirely  sound,  franchise  settlement, 
see  new  franchise  ordinance  of  the  Kansas  City  Railway  &  Light  Company.  This  pro- 
vides among  other  things  that  the  city  shall  have  five  representatives  on  the  Board  of 
Directors.   {Commercial  and  Financial  Chronicle,  vol.  99,  p.  196.) 


208      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

tance  to  investors.  The  regulation  of  public-service  corporations 
Relation  of  ^y  State  commissions  affects  the  safety  of  pubUc- 
pubhc  service      service  Corporation  bonds  fundamentally.  While  this 

corporations  to  ^        ^  ^  -^  _ 

communities       regulation  may  not  always  be  exercised  wisely,  it 

they  serve 

centers  around  substitutcs  for  the  morc  or  Icss  capricious  action  of 
state  ^com-  ^  private  bankers  in  investigation  and  supervision  the 
missions  action  of  state  commissions  raised  above  private  and 

local  considerations.  For  this  reason,  together  with  the  fact  that 
the  subject  is  comparatively  new,  we  will  discuss  state  regulation 
of  public  utihties  at  considerable  length. 

Among  the  earhest  commissions  approaching  at  all  the  character 
of  the  modern  state  public-service  commissions  were  the  New 
Early  com-  Hampshire  Board  of  Railroad  Commissioners  estab- 
missions  lished  in  1844,^  the  Massachusetts  Board  of  Railroad 

Commissioners  established  in  1869,2  and  the  Massachusetts  Gas 
Commission  estabHshed  in  1885.^  Some  of  the  early  commissions, 
such  as  the  Massachusetts  Board  of  Railroad  Commissioners,  had 
no  power  to  enforce  their  recommendations,  except  the  power  of 
pubHc  opinion;  whereas,  others,  Hke  the  Massachusetts  Gas  Com- 
mission, could,  after  a  hearing,  order  changes  in  the  quality  and 
price  of  service  and  decide  appeals  as  to  the  entrance  of  new  com- 
panies into  a  field  already  served.  Most  of  the  early  commissions 
had  jurisdiction  over  steam  railroads  only. 

The  estabHshment  on  a  large  scale  of  modern  public-service 
commissions  having  jurisdiction  usually  over  all  public  utilities 
,,  ,        , ,.      dates  from  1007.  New  York  State  by  an  act  approved 

Modern  public-  ^i  i    •  i       i  i    •  • 

service  com-  Junc  6, 1907,'*  established  two  public-service  commis- 
sions; one  for  the  counties  of  New  York,  Kings, 
Queens,  and  Richmond,  and  the  other  for  the  rest  of  the  State. 
Wisconsin,  by  an  act  approved  July  9,  1907,^  gave  to  the  Railroad 
Commission  full  jurisdiction  over  all  public  utilities.  To-day 
every  State  in  the  Union,  except  Delaware,  Wyoming,  and  Utah, 
has  state  railroad  or  public-service  commissions  of  one  kind  or 
another;  and  Massachusetts,  New  York,  and  South  CaroHna  have 
each  two  distinct  commissions. 

^  Laws  1842-47,  chap.  128.  *  Acts  i86g,  chap.  408. 

'  Acts  1885,  chap.  314,  p.  769.  ■*  Laws  igoy,  chap.  429. 

B  Laws  1907,  chap.  499. 


PUBLIC-SERVICE  CORPORATION  BONDS  209 

We  give  herewith  on  pages  210-12  a  list  of  present  state  com- 
missions, with  the  date  of  their  establishment,  which    Present  state 
have  jurisdiction  over  street-railway,   gas,   electric   commissions 

•■  J  T     o      ■>  havmg  ;uris- 

light  and  power,  or  telephone  properties.  This  Kst  of   diction  over 

,  ,.  .  .     .  ,  ,  street-railway, 

puDUc-service  commissions    shows   how  recent   has   gas,  electric 
been  the  establishment  on  any  wide  scale  of  state   ofteiephmT"' 
commissions  for  the  regulation  of  local  public  utili-   dTe^of"^^'  ^^^ 

^jgg^  establishment 

The  leading  principles  of  regulation  followed  by  these  commis- 
sions with  many  variations  as  to  details  are  as  follows:  — 
(i)  To  control  competition  in  the  interests  of  the   ^    j- 

^  '  ^  ^  ^  Leadmg  pnn- 

pubhc  served  and  of  security-holders.  cipies  of  state 

/-   \    m       •      •  '   r  regulation  of 

(2)  lo  insist  on  adequate  and  satisfactory  ser-   public-service 

corporations 

Vice. 

(3)  To  maintain  rates  that  are  just  and  reasonable  as  based  on 
the  value  and  cost  of  the  service  including  a  fair  return  on  a  fair 
value  of  the  property  devoted  to  public  use. 

(4)  To  supervise  the  issue  of  securities  and  the  keeping  of 
accounts. 

Around  these  general  principles  has  been  built  the  modern  elab- 
orate and  complicated  system  of  state  regulation  of  public  utihties. 

Owing  to  the  great  number  of  state  commissions  and  to  the  fact 
that  most  of  these  have  been  established,  as  stated  above,  only 
recently,  the  working-out  of  these  principles  of  pubKc   p^^^^^j  ^j 
regulation  can  be  seen  best  perhaps  by  discussing  the   sources  of 

,  ,  .     ,  1        1.  1      •       material  used 

state  laws  and  some  of  the  most  recent  leading  deci-   in  discussing 
sions  and  reports  of  the  Board  of  Gas  and  Electric   ^  ^  ^  ^^^^ 
Light  Commissioners  in  Massachusetts;  of  the  two  Public-Service 
Commissions  in  New  York  State;  of  the  Wisconsin  Railroad  Com- 
mission;   and  of  the  California  Railroad  Commission,  together 
with  a  few  decisions  of  special  interest  from  other  States. 
The  question  of  the  control  of  competition  has   „ 

^  ^  Recognition 

come,  in  most  cases,  to  mean  the  recognition  of  mo-    of  monopoly 

1      ,     T->  •   •  r  1       •         r  principle  and 

nopoiy.  ^  Recogmtion  of  monopoly  is  often  a  ques-   certificates 
lion  of  granting  rights  to  operate.  In  a  great  many   con^\"enience 
States,    nowadays,   including   Massachusetts,    New   ^nd  necessity 

*  This  does  not,  of  course,  preclude  competition  from  sources  not  under  public  con- 
trol or  only  partially  under  public  control  —  as  witness  the  "jitneys." 


210      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 


PRESENT  STATE  COIVIMISSIONS  HAVING  JURISDICTION  OVER 
ELECTRIC  RAILWAY,  GAS,  ELECTRIC  LIGHT  AND  POWER, 
AND  TELEPHONE   COMPANIES 


StaU 

Name  of  commission 

Date  of  laws  establishing 

Jurisdiction  * 

Alabama  i 

Railroad    Commission 

Approved  April  23,  1907 

Electric  railways  and  tele- 

of Alabama 

phone  companies 

Arizona ' 

Arizona    Corporation 

Approved  May  28,  19 12 

All    public -service    corpora- 

Commission 

tions 

California  ' 

Railroad     Commission 

Constitutional  amendment 

All    public-service    corpora- 

of California 

adopted  October  10, 191 1; 

tions  —  subject  to  the  right 

act  approved  December 

of  municipalities  to  retain, 

23.  1911 

relinquish,     and     resume 
their   present  rights  over 
local  utilities 

Colorado  * 

Public   Utilities   Com- 

Approved April  12,  1913 

AH    public-service    corpora- 

mission 

tions 

Connecticut  ^ 

Public   Utilities   Com- 

Approved July  11,  1911 

All    public -service    corpora- 

mission 

tions 

Florida  » 

Railroad   Commission- 
ers for  the  State  of 
Florida 

Approved  May  26,  191 1 

Telephone  companies 

Georgia  ' 

Railroad    Commission 

Approved  August  23,  1907 

All    public-service    corpora- 

of Georgia 

tions 

Idaho  8 

Public   Utilities   Com- 

Approved March  13,  1913 

All    public-service    corpora- 

mission of  the  State 

tions 

of  Idaho 

Illinois » 

State   Public   Utilities 

Approved  June  30,  1913 

All    public-service    corpora- 

Commission 

tions 

Indiana  i" 

Public    Service    Com- 

Approved March  4,  1913 

AH    public-service    corpora- 

mission of  Indiana 

tions 

Kansas  " 

Public   Utilities   Com- 

Approved March  14,  191 1 

All    public-service    corpora- 

mission for  the  State 

tions  except  those  owned 

of  Kansas 

by  municipalities 

Kentucky  i' 

Raikoad  Commission 

Approved  March  15,  1912, 

Telephone     companies  — 

and  March  19,  191 2 

limited  jurisdiction 

Louisiana '' 

Railroad    Commission 

Constitution  in  effect 

Telephone  companies 

of  Louisiana 

May  12,  1898 

Maine  ^ 

Public    Utilities   Com- 

Approved March  27,  1913 

All    public-service    corpora- 

mission 

tions 

Maryland  '^ 

Public    Service    Com- 

Approved April  s,  1910 

All    public-service    corpora- 

mission 

tions 

•  This  statement  is  intended  to  indicate  the  scope  of  the  jurisdiction  of  the  various  state  commissions 
only  in  so  far  as  it  affects  those  public-service  corporations  here  in  question,  namely,  electric  railway, 
gas,  electric  light,  power,  and  telephone  companies.  In  addition,  most  of  the  state  commissions  have 
jurisdiction  over  steam  railroads,  and  many  have  jurisdiction  over  municipal  plants,  and  over  private 
water  companies,  telegraph  companies,  express  companies,  irrigation  companies,  pipe-lines,  and  other 
miscellaneous  public-service  enterprises  not  dealt  with  in  this  chapter. 

1  Alabama  Code  Civil  (1907),  chap.  130,  sees.  5632,  5633,  5637,  5647-49,  and,  in  general,  sees.  3632- 
5725. 

2  Laws  IQI2,  chap.  90;  Rev.  Slats,  of  Arizona  (1913),  sees.  2277-2360. 

'  Constitution  of  California  (1879,  as  amended),  art.  xii,  sees.  10-24;  Laws  jqii  (First  Extraordinary 
Session),  chaps.  14-40;  see  Henning's  General  Laws  of  California  (1914),  chap.  430,  p.  1533;  Stats.  1875-76, 
p.  783. 

•  Laws  1Q13,  chap.  127.  See  also  Session  Laws  1885,  p.  307. 
'  Public  Acts  iQii,  chap.  128. 

•  Laws  JQII,  chap.  6186,  no.  67,  and  Laws  igii,  chap.  6187,  no.  68,  superseded  by  Laws  1913,  chap. 
6525,  no.  105. 

'  Laws  1Q07,  no.  223,  p.  72;'Coie,  rprr,  sees.  2613-70. 

8  Session  Laws  IQ13,  chap.  61;  approved  March  13,  1913,  in  effect  May  7,  1913. 

•  Laws  1913,  p.  459. 

10  Acts  1Q13,  chap.  76;  approved  March  4,  1913,  in  effect  May  i,  1913. 

11  Laws  IQII,  chap.  238;  approved  March  14,  1911;  in  effect  May  22,  1911. 

■'  Acts  IQ12,  chap.  99;  approved  March  15,  1912;  Acts  iQiz,  chap.  143;  approved  March  19,  igis. 
"  Constitution,  a.r\.%.  283-289;  in  effect  May  12, 1898.   (Wolff's  Constitution  and  Revised  Laws,  \ol.  2, 
p.  1994.)   Additional  powers.  Ads  1Q08,  no.  igg. 
1*  Laws  1Q13,  chap.  129;  in  effect,  October  31,  1914. 
J8  Laws  igio,  chap.  180;  amended  by  Laws  1912,  chap.  563. 


PUBLIC-SERVICE  CORPORATION  BONDS  211 

JURISDICTION  OF   STATE   COMMISSIONS    {continued) 


Stale 

Name  of  commission 

Date  of  laws  establishing 

Jurisdiction 

Massachasetts  " 

Board  of  Gas  and  Elec- 

Approved July  3,  IQ14 

Gas  and  electric  companies 

tric  Light   Commis- 

(June II,  i88s) 

sioners 

Public  Service  Com- 

In  effect  June  13,  igi3 

Street    railways    and    tele- 

rriLssion 

(June  IS,  i86q) 

phone  companies 

Michigan  " 

Michigan   Raikoad 

Approved  June  2,  igog 

Electric  power  and  telephone 

Commission 

companies,     interurban 
electric  railways 

Mississippi  is 

Railroad  Commission 

Approved  November  i,i8g2 

Telephone  companies  and 

Approved  March  17,  igo8 

electric  railways 

Missouri  '^ 

Public    Service    Com- 

Approved March  17,  1913 

All    public-service    corpora- 

mission of  the  State 

tions 

of  Missouri 

Montana  2» 

Public  Service  Com- 

Approved March  4,  igi3 

All    public-service    corpora- 

mission of  Montana 

tions 

Nebraska  -' 

Nebraska   State  Rail- 

Constitution amended  No- 

Street   railways    and    tele- 

way Commission 

vember  26,  igo6;  act  ap- 
proved March  27,  igo7 

phone  companies 

Nevada  ^a 

State    Railroad    Com- 

Approved March  s,  igo7, 

Electric   railways   and   tele- 

mission    "  Public 

and  March  23,  191 1 

phone     companies,     gas. 

Service  Commis- 

electric   light   and   power 

sion" 

companies 

New  Hampshire '' 

Public  Service  Com- 

In effect  May  15,  1911 

All    public-service    corpora- 

mission 

tions 

New  Jersey  21 

Board  of  PubUc  Utility 

Approved  April  21,  1911 

All    public-service    corpora- 

Commissioners 

tions 

New  Mexico  '^ 

State  Corporation 

Constitution  adopted 

Electric  railways,  power,  and 

Commission 

November  21,  1910 

telephone  companies 

New  York  >« 

Public  Service  Com- 

Approved June  12,  1907 

All    public-service    corpora- 

missions 

tions 

First  District 

Counties  of  New  York, 
Kings,  Queens,  and  Rich- 
mond 

Second  District 

Balance  of  State 

North  Carolina  " 

Corporation  Com- 

Approved March  6,  1899; 

Street    railways    and    tele- 

mission 

March  14,  1901;  March 

phone     companies,     gas, 

11,  1907;  March  11,  1913 

electric  light  and  power 
companies  —  except  those 
owned  by  municipalities 

North  Dakota  ^s 

Board  of  Railroad 

Approved  March  8,  1897, 

Telephone  companies 

Commissioners 

and  March  3,  191 1 

Ohio  2» 

Public   Utilities   Com- 

Approved May  s,  igi3 

All    public-service    corpora- 

mission of  Ohio 

(May  31,  igii) 

tions 

1'  Acts  1885,  chap.  314,  and  acts  in  amendment  thereof.  For  present  law  see  act  approved  July  3, 1914; 
Acts  1914,  chap.  742;  Acts  1S69,  chap.  408.  Present  board  established  by  act  in  effect  June  13, 1913;  Acts 
1913,  chap.  784. 

1'  Public  Acts  iQOQ,  no.  300,  approved  June  2, 1909,. in  effect  September  i,  1909,  succeeding  former  Rail- 
road Commission.  See  also  Public  Acts,  iQii,  no.  138,  as  amended  by  Public  Acts  IQIJ,  no.  206.  Public 
Acts  IQOQ,  no.  106. 

18  Mississippi  Cade  IQ06,  chap.  139,  sees.  4826-99;  Laws  IQ08,  chap.  80. 

i»  Laws  IQ13,  p.  556.  2°  Laws  IQ13,  chap.  32. 

'1  Constitution,  art.  5,  sec.  19a;  Statutes  IQ07,  chap.  90;  Revised  Statutes,  IQ13,  sees.  6104-55. 

'2  Statutes  IQ07,  chap.  44;  approved  March  s,  1907.  See  R.  L.  Jpz2,secs.  4549-85;  Statutes  jpir, chap. 
162;  R.  L.  IQ12,  sees.  4515-48;  R.  L.  IQ12,  sec.  4550(2). 

"  Laws  IQII,  chap.  164;  Public  Statutes  and  Session  Laws  (Supplement,  1913),  pp.  335-60. 

**  Laws  IQII,  chap.  195. 

>s  Constitution,  art.  xi,  sees.  7-11;  adopted  November  21,  1910.  See  also  Laws  IQI2,  chap.  78. 

•8  Laws  IQ07,  chap.  429;  approved  June  12,  1907;  in  effect  July  i,  1907;  amended  by  Laws  igio,  chaps. 
480,  673;  and  by  Laws  1Q13,  chaps.  344,  504,  505,  506,  597,  etc.  For  the  law  as  amended,  see  Birdseye, 
Cons.  Laws  (Suppl.  1910-13),  pp.  2145-2245.  For  list  of  all  amendments,  see  Laws  1Q13  (Extraordinary 
Session),  Table  of  Laws  and  Codes  amended  or  repealed,  p.  72. 

2'  Public  Laws  i8qq,  chap.  164'  Public  Laws  iQoi,  chap.  679;  Public  Laws  IQ07,  chaps.  469,  966;  Pell's 
Revisal  of  1Q08,  sees.  1054  to  1118,  as  amended  by  Public  Laws  igii,  chap.  197;  Public  Laws  1913  (Extraor- 
dinary Session),  chap.  63;  Public  Laws  IQ13,  chap.  127. 

S8  Laws  i8q7,  chap.  115.  Compiled  Laws  IQ13,  sees.  4708-83;  also  ibid.,  sees.  579-601.  See  also  Laws 
Jpii,  chap.  241. 

'*  House  Bill  no.  582;  approved  May  5, 1913  {Laws  J913,  p.  804),  superseding  PubUc  Service  Commis- 
sion established  by  House  Bill  no.  325;  approved  May  31,  1911;  in  effect  June  30,  1911  (Laws  1911, 
p.  549)- 


212    AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 
JURISDICTION  OF  STATE   COMMISSIONS    (continued) 


Slate 

Name  of  commission 

Dale  of  laws  establishing 

Jurisdiction 

Oklahoma  'o 

Corporation    Commis- 

Constitution adopted  igo?; 

All    public -service    corpora- 

sion 

act  approved  March  25, 

tions 

Oregon  '• 

Railroad    Commission 

1013 
In  effect  November  29, 

AH    public-service    corpora- 

of Oregon 

1912 

tions  except  those  owned 
by  municipalities 

Pennsylvania  '^ 

Public    Service    Com- 

Approved July  26,  1913 

AH    public-service    corpora- 

mission of  the  Com- 

tions 

monwealth  of  Penn- 

sylvania 

Rhode  Island  " 

Public    Utilities   Com- 

Approved April  17,  1912 

AH    public-service    corpora- 

mission 

tions 

South  Carolina  '« 

Railroad  Commission 

Constitution  adopted 

Interurban  electric  railways, 

December  .^1,  1895;  act 

power  t     and     telephone 

approved  F'ebruary  25, 

companies 

1904;  act  in  effect 

February  24,  1913 

Public    Service    Com- 

Approved February  23, 

Gas  and  electric  companies 

mission 

1910 

except  in  certain  cities 

South  Dakota  ^s 

Railroad  Commission 

Approved  March  10,  191 1 

Telephone  companies 

Tennessee  39 

Railroad  Commission 

Approved  April  3,  1913 

Telephone  companies 

Vermont  " 

Public    Service    Com- 

Approved January  20,  1909 

All    public-service    corpora- 

mission 

(December  14,  1906) 

tions 

Virginia  " 

State   Corporation 

Approved  April  15,  1903 

All    public-service    corpora- 

Commission 

and  March  27,  1914 

tions;  limited  in  case  of 
electric  railways 

Washington  3' 

Public  Service    Com- 

Approved March  18,  191 1 

AH  public-service  corpora- 

mission 

tions 

West  Virginia  *o 

Public    Service    Com- 

Passed February  21,  1913 

All    public -service    corpora- 

mission 

tions 

Wisconsin  ^i 

Railroad    Commission 

Approved  July  9.  1907 

AH    public-service    corpora- 

of Wisconsin 

tions 

'"  Constitution  of  1907,  art.  DC,  sees.  15-35;  Session  Laws  IQ13,  chap.  93. 

51  Laws  igii,  chap.  279.  ^^  Laws  IQ13,  no.  854.  '^  Laws  iqt2,  chap.  795. 

^*  Laws  iQio,  no.  286;  Laws  1912,  no.  310;  Constitution  (adopted  December  31,  1895),  art.  ix,  sec.  14; 
Laws  iSq8,  no.  4S6;  Laws  1904,  chap.  281;  Laws  IQIS,  no.  iig.  See  Civil  Code  1912,  sees.  3138-64. 

35  Session  Laws  1911,  chap.  207. 

3»  Public  Acts  1913,  chap.  32. 

"  Laws  iQoS,  chap.  116;  Laws  1912,  no.  166;  Laws  1906,  no.  126. 

58  Acts  1902-03-04,  chap.  147.  Pollard's  Code  (1904),  sec.  1313a;  see  also  ibid.,  sec.  1294a;  Acts  1914, 
chap.  340. 

3'  Laws  1911,  chap.  117.  *"  Acts  1913,  chap.  9. 

<i  Laws  1907,  chap.  499;  approved  July  9,  1907;  pubHshed  July  11,  1907;  Laws  1907,  chap.  578;  ap- 
proved July  12,  1907;  published  July  13,  1907.  See  also  Laws  1907,  chaps.  454  and  614;  Laws  1911,  chap. 
663.    For  these  and  other  amendments  see  Wisconsin  Statutes  (1911),  sees.  I79S-I797T-I2.     See  also 
Laws  1913,  chap.  772,  sees.  101-03;  chaps.  63,  66,  331,  401,  453,  518,  523,  603,  621,  681,  and  755. 
t  t  Jurisdiction  over  power  companies  is  not  clear. 

York,  Pennsylvania,  Ohio,  Wisconsin,  and  California,^  these  rights 
are  granted  through  the  issue  of  certificates  of  public  convenience 
and  necessity. 2 

*  Massachusetts:  Acts  1906,  chap.  463,  part  2,  sees.  18,  21,  24,  and  71;  and  part  3, 
sec.  7,  as  amended  by  Acts  1909,  chap.  417,  sec.  i;  Acts  1914,  chap.  742,  sees.  155-60; 
Acts  1914,  chap.  787,  sees.  9  and  10;  see  also  Acts  1910,  chap.  518;  Acts  1906,  chap.  463, 
part  3,  sees.  9  and  44;  Acts  1911,  chap.  442;  Acts  1908,  chap.  266;  New  York:  Laws 
1910,  chap.  480,  sees.  53  and  68;  chap.  481,  sees.  9  and  10;  chap.  673,  sec.  3;  N.Y.  Com. 
Laws,  chap.  48,  sees.  53,  68,  and  99  (i);  Pennsylvania:  Laws  191 3,  no.  854,  art.  3, 

^  It  has  been  remarked  with  some  show  of  reason  that,  under  modem  conditions, 
public-service  corporation  franchises  exist  to  enable  bankers  to  sell  the  bonds. 


PUBLIC-SERVICE  CORPORATION  BONDS  213 

Certificates  of  public  convenience  and  necessity  are  not  issued 
unless  the  commissions  are  convinced  that  the  granting  of  addi- 
tional facilities  is  for  the  public  good.    The  commis-   ^    ,.,. 

^_   ^  °  _        _  Conditions 

sions  have  taken  the  position  that  duplication  of   under  which 
plants  is  paid  for,  in  the  long  run,  either  by  the  public   of  public 

•  •  1*1  1.  t-  "i      T-    ij  convenience 

m  poorer  service  or  higher  rates  or  by  security-holders  and  necessity 
in  losses  on  their  investment.  Accordingly,  unless  the  ^^^  '^^"*^'^ 
granting  of  rights  to  do  a  competitive  business  is  absolutely  neces- 
sary, in  the  opinion  of  the  commission,  in  order  to  obtain  good  ser- 
vice or  reasonable  rates,  such  rights  are  not  granted.^  In  Indiana  ^ 
and  in  Wisconsin  ^  even  a  municipality  cannot  compete  with  an 
existing  public-service  corporation  without  first  obtaining  a  certifi- 
cate of  public  convenience  and  necessity.^ 

Closely  connected  with  the  recognition  by  commissions  of  the 

sees.  2,  3,  and  5;  art.  5,  sees.  18  and  19;  Ohio:  Laws  1911,  House  Bill,  no.  325,  sec.  54; 
Wisconsin :  Z,aK'5  1913,  chap.  621;  chap.  755,  sec.  2  (sec.  1596,  62-64),-  Laws  1907,  chap. 
454,  sec.  1 797-39;  California:  Stats.  191 1,  E.xtra.  Session,  p.  18;  Henning's  General  Laws 
of  California  (19 14),  chap.  430,  act  3775,  sec.  50.  For  laws  of  other  States  covering 
certificates  of  public  convenience  and  necessity  see  Arizona:  Laws  191 2,  chap.  90, 
sec.  50;  Rev.  Stats.  1913,  Civil  Code,  sec.  2326;  Colorado:  Session  Laws  1913,  chap.  127, 
sec.  35;  Connecticut:  Public  Acts  1899,  chap.  158,  sees.  1-4;  Gefieral  Stats.  1902,  sees. 
3846,  3917,  3920;  Idaho:  Session  Laws  1913,  chap.  61,  sec.  48;  Illinois:  act  approved 
June  30,  1913,  sec.  55;  Laws  1913,  p.  488;  Indiana:  Acts  1913,  chap.  76,  sees.  97-98; 
Kansas:  Laws  1911,  chap.  238,  sec.  31;  Maine:  Rev.  Stats.,  chap.  55,  sec.  i,  as  amended 
by  Laws  1913,  chap.  129,  sees.  27  and  28,  in  effect  October  31,  1914;  Maryland:  Laws 
1910,  chap.  180,  sees.  26  and  T,y,  Michigan:  Public  Acts  1913,  no.  206,  sec.  9;  Missouri: 
Senate  Bill  no.  i,  approved  March  17,  1913,  sees.  53,  74,  and  96;  Laws  1913,  p.  556; 
New  Hampshire:  Laws  1911,  chap.  164,  sec.  12  (a)  and  sec.  13  {a),  as  amended  by 
Laws  1 91 3,  chap.  145,  sec.  13;  South  Dakota:  Session  Laws  1911,  chap.  211;  Vermont: 
Public  Stats.  1906,  sec.  4338. 

1  Weld  V.  Gas  and  Electric  Light  Comrs.,  197  Mass.  556,  84  N.E.  loi ;  Atty.-General 
V.  Haverhill  Gas  Light  Co.,  215  Mass.  394;  Atty.-General  ex  rel.  v.  Walworth  L.  &  P. 
Co.,  157  Mass.  86,  31  N.E.  482,  16  L.R.A.  398;  In  re  Longacre  Electric  Light  &  Power 
Co.,  Public  Service  Corn.  Reports,  1st  Dist.  (New  York),  vol.  i,  p.  226,  affirmed  on 
appeal  in  People  ex  rel.  The  N.Y.  Edison  Co.  v.  Willcox  et  al.,  207  N.Y.  86  (reversing 
151  N.Y.  App.  Div.  832) ;  Calumet  Service  Co.  v.  Chilton,  148  Wis.  334,  135  N.W.  131; 
State  ex  rel.  Kenosha  G.  &  E.  Co.  v.  Kenosha  Electric  Ry.  Co.,  145  Wis.  337,  129  N.W. 
600  (confirmation  by  State  Supreme  Court  of  monopoly  principle) ;  Pacific  G.  &.  E.  Co. 
V.  Great  Western  Power  Co.,  Opinions  and  Orders  of  the  Railroad  Commission  of  Cali- 
fornia, vol.  I,  p.  203;  In  re  Oro  Electric  Corp'n.  Transmission  Lines,  ibid.,  p.  253; 
In  re  AppUcation  Oro  Electric  Corp'n,  ibid.,  p.  700. 

2  Acts  1913,  chap.  76,  sec.  98. 

'  Laws  1907,  chap.  499,  sec.  1797M-74,  sees.  3  and  4. 

*  In  Massachusetts,  the  same  result  is  arrived  at  by  the  statute  compelling  a  muni- 
cipality, which  has  voted  to  establish  a  municipal  plant,  to  purchase  at  a  fair  value  the 
existing  plant  of  the  local  public-service  corporation.  {Acts  1914,  chap.  742,  sec.  100.) 


214     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

monopoly  principle  is  the  power  to  approve  consolidations.  The 
Attitude  of  general  rule  is  that  consolidations  are  permitted  when 
tov'^^d^con-^  in  the  judgment  of  the  commissions  they  will  result  in 
soUdations         better  service  or  lower  rates.^ 

In  Massachusetts,  when  two  companies  are  consolidated,  the 
capital  of  the  new  company  at  the  time  of  consolidation  shall  not 
^   .         , .  ,      exceed  in  amount  the  sum  of  the  separate  capitals  of 

Basis  on  which  •       n  i 

consolidations  the  former  compames.  In  New  York  State,  the 
are  permi  e  Secoud  District  Commission  recently  has  been  per- 
mitting the  purchase  of  one  company  by  another  at  a  price  in  excess 
of  the  original  cost  of  the  physical  property,  provided  such  excess 
is  amortized  or  charged  off  from  earnings  during  a  reasonable  period 
of  years.^  In  Wisconsin,  the  purchase  of  the  property  of  one  public- 
service  corporation  by  another  shall  be  at  a  price  not  in  excess  of 
the  value,  as  determined  by  the  commission/ 

In  view  of  the  general  recognition  of  public-ser- 
municipai  vicc  Corporations  as  monopolies,  the  laws  of  many 

pure  ase  States,  among  which  may  be  mentioned  Massachu- 

setts,^ Illinois,^  and  Wisconsin,''  provide  for  possible  purchase  of 

^  For  recent  cases  in  consolidations  see  Massachusetts:  Springfield-Chicopee, 
Twenty-eighth  Ann.  Rep.,  Board  of  Gas  and  Electric  Light  Comrs.  (1912),  p.  67;  New 
Bedford  Gas  Co.  and  New  Bedford  Elec.  Co.,  Fourth  Ann.  Rep.,  Board  of  Gas  and 
Electric  Light  Comrs.  (1889),  p.  73;  Worcester  Gas  Light  Co.  and  Worcester  Electric 
Light  Co.,  Sixth  Ann.  Rep.,  Board  of  Gas  and  Electric  Light  Comrs.  (1891),  p.  12; 
New  York :  In  the  Matter  of  the  Joint  Application  of  Rockland  Light  and  Power  Co. 
and  Rockland  Electric  Co.,  etc.,  PubUc  Service  Com.,  2d  Dist.  (New  York),  no.  176, 
decided  April  28,  1914.  California:  In  the  Matter  of  the  Application  of  Midland  Coun- 
ties PubHc  Service  Corporation,  3  Cal.  R.R.  Com.  Dec.  598;  In  the  Matter  of  the 
Apphcation  of  Valley  Gas  and  Fuel  Co.,  etc.,  2  Cal.  R.R.  Com.  Dec.  589;  In  the 
Matter  of  the  Apphcation  of  Livermore  Water  &  Power  Co.,  etc.,  2  Cal.  R.  R.  Com. 
Dec.  618.  See  also  New  York  Laws  1910,  chap.  480,  sec.  54,  as  amended  by  Laws 
1 91 4,  chap.  220. 

*  Acts  1914,  chap.  742,  sec.  168.  In  view  of  the  fact  that  in  Massachusetts  pubhc- 
service  corporations  cannot  have  a  total  capitaUzation  in  excess  of  their  physical  value, 
tliis  is  equivalent  to  sajdng  that  companies  formed  through  consolidations  cannot  have 
a  capitalization  in  excess  of  the  physical  property. 

'  See  Public-Service  Commission,  New  York,  2d  District,  Eighth  Annual  Report 
(1914),  p.  67,  and  no.  176,  dated  April  28,  1914  (Rockland  Light  and  Power  case). 

*  Wisconsin  Statutes  (1911),  chap.  85,  sec.  1753-11;  Laws  igii,  chap.  593,  sec. 
1 753-1 1,  as  amended  by  Laws  1911,  chap.  664,  sec.  133. 

^  Acts  1914,  chap.  742,  sees.  92  to  125. 

^  Laws  1913,  p.  455.    (Senate  Bill  no.  538,  approved  June  26,  1913.) 
^  Laws  1907,  chap.  499,  sec.  1797M-79  to  82,  as  amended  by  Laws  igog,  chap.  213, 
and  by  Laws  1911,  chaps.  13  and  596,  and  by  Laws  1913,  chap.  160. 


PUBLIC-SERVICE  CORPORATION  BONDS  21 5 

the  property  of  local  public-service  corporations  by  the  munici- 
palities. In  our  opinion,  this  right,  whether  exercised  or  not,  should 
exist  in  all  States. 

As  soon  as  the  principle  of  monopoly  Is  recognized,  the  questions 
of  rates  and  service  become  of  prime  importance.  We 

.„        1  /-I  1      •  r  •  1        Regulation 

Will  take  up  first  the  regulation  of  service  as  estab-   of  rates  and 
lished  by  statutes  and  by  commission  decisions  and 
reports. 

In  the  past,  standards  of  service  often  have  been  prescribed  by 
direct  legislative  enactment.^  The  modern  tendency,  however,  is 
to  give  public-service  commissions  general  authority  Regulation 
to  enforce  standards  of  service.  In  Massachusetts,  °^  service 
New  York,  Wisconsin,  and  California,  as  well  as  in  many  other 
States,  the  powers  so  granted  to  the  commissions  are  fairly  com- 
plete and  comprehensive.  The  authority  of  the  commissions  in 
Massachusetts  ^  to  investigate  and  change  service  is  especially  com- 
plete. The  Wisconsin  ^  law  goes  so  far  as  to  make  mandatory  on 
the  commission  the  ascertaining  and  prescribing,  "for  each  kind 
of  public  utility,  suitable  and  convenient  standard  commercial 
units  of  product  or  service."  The  extent  of  the  authority  of  state 
commissions  over  service  shows  a  tendency  all  the  time  to  increase. 

In  the  matter  of  service  there  are  usually  three  elements  to  be 
considered :  — 

/   s  „    ,  ^  Three  leading 

(1)  Saiety.  elements  of 

(2)  Extent  of  service.  service 

(3)  Character  of  service. 

Any  two  of  these  elements,  and  sometimes  all  three  combined, 
are  likely  to  appear  in  a  single  case  involving  the  regulation  of 
service. 

On  the  question  of  the  safety  of  service,  the  statutes  in  a  large 
majority  of  the  States  confer  specific  authority  on  the  commis- 
sions to  prescribe  such  regulations  as  may  insure   safety  of 
safety  of  operation.^   This  is  true  in  the  four  States,   service 

1  Standard  quality  of  gas  fixed  in  Connecticut.  See  Gen.  Stats.  1902,  sec.  4569,  and 
in  Ohio,  General  Code  xgio,  sees.  9326-31. 

2  Acts  1914,  chap.  742,  sees.  161,  162,  163;  Acts  191  j,  chap.  784,  sees.  23-24. 
'  Laws  1902,  chap.  499,  sec.  1797M-22  to  23. 

*  See  Commission  Regulation  of  Public  Utilities,  New  York  (19 13),  p.  651,  and 
following. 


2l6     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Massachusetts,  1  New  York,^  Wisconsin,^  and  California,^  which 
we  have  taken  as  illustrating  many  of  the  principles  in  this 
chapter. 

In  the  matter  of  the  extent  of  the  service,  the  general  rule  is  that 
service  shall  be  as  nearly  universal  in  extent  as  is  practicable  under 
Extent  of  the  circumstauces.  Service  in  excess  of  the  reasonable 

service  nccds  of  a  Community  and  service  inadequate  to  the 

reasonable  needs  of  a  community,  both  are  discouraged,  although 
the  commissions  naturally  are  inclined  to  approve  service  too  elab- 
orate rather  than  service  at  all  likely  to  be  considered  inadequate.^ 

Provision  is  made  in  many  States,  including  Massachusetts,^ 
Wisconsin,^  and  California,^  for  joint  use  of  faciUties  or  through 
Joint  use  of  service  by  two  or  more  pubhc-service  corporations. 
facilities  -pj^g  California  Commission  in  a  recent  case  ^  ordered 

physical  connection,  through  routes  and  joint  rates,  for  telephone 
service  against  the  objection  of  one  of  the  companies. 

In  the  matter  of  the  character  of  the  service,  the  commissions 
either  lay  down  definite  uniform  standards,  as  in  Wisconsin,  or  de- 
Character  cide  the  qucstion  of  service  on  the  merits  of  each  indi- 

of  service  vidual  casc,  as  in  Massachusetts.   To  enforce  a  proper 

standard  of  service,  the  Massachusetts  Commission,  upon  com- 
plaint, and  the  Wisconsin  Commission  upon  its  own  initiative  and 
as  a  matter  of  periodic  practice,  make,  sometimes  with  the  assist- 

^  Acts  igo6,  chap.  463,  part  3,  sec.  90,  as  amended  by  Acts  1913,  chap.  357;  chap. 
784,  sees.  23-24. 

2  Laws  1910,  chap.  480,  sec.  49,  2;  see  Birdseye,  C.  &  G.  Consol.  Laws,  Suppl.  1910- 
13,  p.  2180;  Laws  1 910,  chap.  480,  sec.  66,  2;  see  Birdseye,  C.  &  G.,  Consol.  Laws, 
Suppl.  1910-13,  p.  2201. 

*  Laws  1911,  chap.  297,  sec.  1797-90  and  qh;  Laws  1907,  chap.  454,  sec.  1797-57, 
as  amended  by  Laws  1909,  chap.  475,  Laws  191 1,  chap.  590,  sec.  1797-12^. 

*  Stats.  1911,  E.xtra.  Sess.,  p.  18,  as  amended  by  Stats.  1913,  p.  942.  See  Henning's 
Gen.  Laws  of  California,  vol.  5  (1914),  chap.  430,  sec.  42,  p.  1549. 

^  See  decision  of  the  California  Railroad  Commission  ordering  the  San  Joaquin 
Light  and  Power  Corporation  to  serve  certain  ranchers,  irrespective  of  whether  such 
additional  consumers  will  provide  a  return  equal  to  that  from  the  present  patrons, 
provided  the  system  as  a  whole  is  operated  at  a  profit.  (Ranney  v.  San  Joaquin  Light 
and  Power  Co.,  5  Cal.  R.R.  Com.  Dec.  587.) 

8  Acts  1911,  chap.  487. 

'  Laws  1907,  chap.  499,  sec.  1797M-4,  as  amended  by  Laws  1911,  chap.  546. 

*  Stats.  1911,  ist  Extra.  Sess.,  p.  18,  sec.  40-41.  Henning's  Gen.  Laws  of  California 
(1914),  vol.  5,  chap.  430,  p.  1549. 

9  Tehama  County  Tel.  Co.  v.  Pacific  Tel.  &  Tel.  Co.,  2  Cal.  R.R.  Com.  Decisions, 
104  (1913)- 


PUBLIC-SERVICE  CORPORATION  BONDS  217 

ance  of  the  public-service  corporations  themselves,  thorough  tests 
of  the  facilities  and  service  furnished. 

In  all  matters  of  service,  the  general  principle,  familiar  in  rail- 
road regulation,  is  laid  down  that  service  shall  not  be   other  prin- 
discriminatory  as  against  persons  or  places.^  Further-   regulation 
more,  service  shall  be,  as  far  as  possible,  free  from  of  service 
accidents,  uninterrupted  and  uniform. 

Regulation  of  service  should  be  at  once  efficient  and  flexible.   It 
is  to  be  remembered  that  conditions  of  service  in  different  places  and 
at  different  times  vary  greatly.    "Every  State  pre-   „     .   . 
sents  some  peculiar  conditions  that  deserve  consider-   of  service 

.  .  1  •  1    1  should  be 

ation,  A  prairie  State  which  has  no  water-power,  no  efficient  and 
cheap  fuel,  which  is  essentially  an  agricultural  dis- 
trict, with  few,  if  any,  large  cities,  certainly  differs  from  one  with 
large  urban  centers,  which  abounds  in  natural  resources  and  which 
possesses  many  large  isolated  power  users."  ^  Furthermore,  the 
cost  of  the  service,  the  commercial  possibilities,  and  every  other 
factor  entering  into  each  individual  case  should  be  taken  into  con- 
sideration.^ 

The  interrelationship  between  service  and  rates  is  obvious.  If 
the  rates  for  street-railway,  gas,  electric  light  and  power,  or  tele- 
phone service  are  too  low,  the  character  of  the  service 

rr  y^        1  1  1  1     -r      1         Intcrrelation- 

is  almost  sure  to  surfer.    On  the  other  hand,  if  the   ship  of  service 
service  prescribed  is  elaborate  and  expensive,  the 
rates  charged  for  such  service  must  be,  other  things  being  equal, 
correspondingly  high. 

1  Postal  Cable  Telegraph  Co.  v.  Cumberland  T.  &  T.  Co.,  177  Fed.  Rep.  726; 
Hatch  V.  Consumers'  Co.,  Ltd.,  17  Idaho,  204,  104  Pac.  670,  40  L.RA.  (N.S.)  263; 
Central  Union  Telephone  Co.  v.  State  ex  rcl.,  118  Ind.  194,  19  N.E.  604;  Kilboum  City 
V.  Southern  Wis.  Power  Co.,  149  Wis.  168,  135  N.W.  499;  Pond,  Public  Utilities 
(Indianapolis,  1913),  chap,  xrn,  sees.  208  to  229. 

2  L.  H.  Harris,  Service  Regulations  for  Electrical  Utilities  in  State  Regulation  of 
Public  Utilities  (Philadelphia,  19 14),  p.  286. 

*  For  a  few  recent  cases  in  commission  regulation  of  service  see  Massachusetts: 
Petition  of  the  Cambridge  Board  of  Trade  relative  to  service  of  the  Boston  Elevated 
Railwa}',  First  Anmial  Report,  PubUc-Service  Commission  (19 14),  p.  133;  Petitions 
of  E.  H.  Vaughan  in  re  Worcester  Consolidated  Street  Railway,  ibid.,  p.  157;  Peti- 
tion of  Customers  v.  Natick  Gas  Light  Company,  Twenty-eighth  Annual  Report, 
Board  of  Gas  and  Electric  Light  Commissioners,  p.  32.  New  York:  In  the  matter  of 
Additional  Cars  on  Brooklyn  Lines,  3  P.  S.  C.  R.  (ist  Dist.,  N.Y.),  37  and  716.  Cali- 
fornia: City  of  San  Jose  v.  Pacific  Tel.  &  Tel.  Co.,  3  Cal.  R.R.  Com.  Dec.  720  (1913). 
Wisconsin:  Civic  League  et  al.  v.  Beaver  Dam  Water  Co.,  10  W.  R.  C.  R.  661. 


2l8      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

In  the  matter  of  rates  to  be  charged  by  public-service  corpora- 
tions, the  following  principles  prevail:  (i)  Rates  must  be  reasonable 
Principles  of  both  to  the  customer  and  to  the  corporation,  and  if 
pubii?  servfcl°^  they  cannot  be  reasonable  to  both,  they  must  be  to  the 
corporations  customer  —  that  is,  the  customer  cannot  be  made  to 
pay  more  than  a  fair  value  of  the  service  rendered;  ^  (2)  there  must 
be  a  fair  return  on  the  reasonable  value  of  the  property  at  the  time 
it  is  being  used  for  the  public. ^  These  principles  have  been  estab- 
lished by  federal  and  state  laws  and  confirmed  by  numerous  de- 
cisions of  the  courts.^ 

To-day  a  large  number  of  the  States  give  the  public-service  com- 
missions mandatory  power  over  rates.  The  right  to  initiate  rates 
.  ,,    .,     ,        is  reserved  almost  everywhere  to  the  utilities.    In  a 

Authority  of 

commissions        large  number  of  the  States,  however,  the  commissions 

over  rsites  •  • 

are  given  authority  to  suspend  the  operation  of  rates 
fixed  by  utilities  pending  an  investigation  by  the  commissions  as 
to  their  reasonableness.^ 

Provided  the  rates  charged  for  service  are  not  in  excess  of  the 
value  of  the  service  to  the  consumers,  rates  for  public  service  are 

based  on  what  may  be  called,  in  the  broadest  sense,  the 
sen^^ce,^cost°  cost  of  the  servicc.  This  cost  has  been  early  defined 
the  broadest  ^  Massachusetts  ^  as  made  up  of  the  following  three 
sense,  is  the        factors:  (i)  Fair  cost,  meaning  fair  manufacturing 

cost  of  the  product  or  service;  (2)  a  fair  return  on  a 
reasonable  amount  of  capital;  (3)  such  excess  as  will  give  the  cor- 
poration sufficient  surplus  to  meet  extraordinary  accidents  and  con- 
duct its  business  with  the  highest  economy.  In  New  York  State,®  it 

^  Brunswick  &  T.  Water  Dist.  v.  Maine  Water  Co.,  99  Maine,  371,  59  All.  537 
(1904);  Covington  &  Lex.  Turnpike  Co.  v.  Sandford,  164  U.S.  578;  Spring  Valley 
Water  Works  v.  San  Francisco,  192  Fed.  Rep.  137. 

2  Peckham,  J.,  in  Willcox  v.  Cons.  Gas  Co.,  212  U.S.  19,  at  41. 

'  See  Smyth  v.  Ames,  169  U.S.  466,  at  546. 

*  See  State  Regulation  of  Public  Utilities  (Philadelphia,  19 14),  p.  16.  For  commission 
orders  changing  rates  see  Massachusetts:  Mayor  of  Worcester  v.  Worcester  Electric 
Light  Co.,  Board  of  G.  &  E.  Lt.  Comrs.,  Twenty-eighth  Annual  Report  (1912),  p.  15; 
New  York:  Fuhrmann  v.  Cataract  Power  and  Conduit  Co.,  3  P.  S.  C.  (2d  Dist.,  N.Y.), 
p.  656  (1913);  Wisconsin:  City  of  Milwaukee  d.  The  Milwaukee  E.  R.  &  L.  Co.,  10 
W.  R.  C.  R.  I  (1912);  California:  City  of  San  Jose  v.  Pacific  Tel.  &  Tel.  Co.,  3  Cal.  R.R. 
Com.  Dec.  720  (19 13). 

^  See  petition  of  customers  of  the  Springfield  Gas  Company  for  reduction  in  price, 
Report,  Board  of  Gas  and  Electric  Light  Commissioners  (1894),  p.  6. 

8  Laws  igio,  chap.  480,  sec.  97. 


PUBLIC-SERVICE  CORPORATION  BONDS  219 

is  provided  by  statute  that  in  making  rates  due  regard  must  be 
given  to  a  reasonable  average  return  upon  the  value  of  the  property 
actually  used  in  the  pubUc  service  and  to  the  necessity  of  making 
reservation  out  of  income  for  surplus  and  contingencies.  In  Wiscon- 
sin/ the  Railroad  Commission  has  laid  down  the  following  rule:  that 
"under  normal  or  ordinary  conditions,  public  utiUties  are  entitled 
to  earnings  that  will  cover  the  operating  expenses,  including  de- 
preciation and  a  fair  return  on  the  investment."  The  methods  of 
determining  the  cost  of  service  as  a  basis  for  rates  in  Massachusetts, 
New  York,  and  Wisconsin  have  been  followed,  in  a  general  way, 
by  all  the  other  state  commissions. 

The  factor  in  the  cost  of  service  that  has  caused  the  most  diffi- 
culty and  the  most  discussion  is  what  has  been  called  a  fair  return 
on  a  reasonable  amount  of  capital  or  on  a  reasonable  ^  .     ^ 

^  Fair  return 

value  of  the  property  devoted  to  pubhc  use.    This  on  fair  value 
question  involves,  (i)  what  is  a  fair  rate  of  return;  (2)   °  ^^°^^  ^ 
what  constitutes  a  fair  value  of  property  devoted  to  public  use. 

The  rate  of  return  on  capital  invested  in  pubHc-service  corpora- 
tions is  governed,  in  a  broad  way,  by  the  rate  of  return  on  other 
forms  of  investment. 2    Obviously,  however,  the  rate 

.  ...  ,   .  .  ,        Rate  of  return 

of  return  on  capital  invested  m  corporations  under 
public  protection  should  be  less  than  the  rate  of  return  on  capital 
invested  in  competitive  or  extra-hazardous  undertakings.  Again, 
the  rate  of  return  where  the  business  is  well  managed  should  be 
greater  than  the  rate  of  return  where  it  is  poorly  managed.  In  gen- 
eral, the  rate  of  return  should  be  a  rate  that  permits  continued 
investment  in  old  properties  and  induces  original  investment  in 
new  properties.^  No  hard-and-fast  rule  can  be  laid  down  as  to 
what  constitutes  a  fair  rate  of  return,  but  this  rate  must  be  deter- 
mined in  each  individual  case  and  after  taking  into  consideration 
all  the  factors  which  bear  on  the  problem.^ 

1  In  re  Appl.  Manitowoc  Gas  Co.,  3  Wis.  R.R.  Com.  Rep.  163,  at  171  (1908). 

*  New  Memphis  Gas  Light  Co.  v.  Memphis,  72  Fed.  Rep.  952. 

'  An  interesting  suggestion  has  been  brought  forward  recently  called  the  "variable 
rate  of  return."  This  plan  involves  increasing  the  rate  of  return  in  proportion  to  a 
reduction  in  the  average  selling  price  of  the  product  or  service  and  is  similar  to  the 
sliding  scale  arrangement  discussed  earlier  in  this  chapter.  (See  Henry  I.  Lea,  The 
Fixed  Rale  of  Return  on  UtilUies,  reprinted  from  the  Gas  Record,  Chicago,  November 
25,  1914-) 

*  See  United  States  Supreme  Court:  Willcox  v.  Consolidated  Gas  Co.,  212  U.S.  19, 
29  Sup.  Ct.  192;  S3  L.  ed.  382  (1909),  six  per  cent;  New  York:  (ist  Dist.  Commission) 


220     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Determination  of  what  is  the  fair  value  of  the  property  devoted 
to  public  use  leads  to  the  vast  and  extremely  complicated  subject 
Fair  value  of  ^f  valuation  as  a  basis  for  rates.  In  Massachusetts 
property  ^^^  ^  California,  among  other  States,  the  commis- 

sions may  make  valuations,  and  in  Wisconsin,  the  commission 
must  make  valuations  of  the  property  of  any  and  all  public-service 
corporations.^ 

There  are  to-day  two  leading  theories  as  to  the  proper  method  of 
valuation  as  a  basis  for  rates:  (i)  The  so-called  original-cost  theory; 
Two  theories  and  (2)  the  theory  of  cost  of  reproduction. ^  Some 
asTbasi's^"  commissions  base  their  findings  almost  entirely  on 
ferrates  tj^g  original-cost-thcory;  for  example,  the  St.  Louis 

Public-Service  Commission,^  Other  commissions  '^  have  appeared 
at  times  to  accept  without  reservation  the  cost-of-reproduction 
theory. 

The  best  and  most  recent  authorities,  however,  are  disposed  to 
Best  modern  follow  no  ouc  theory,  but  to  base  their  findings  as  to 
practice  favors     valuation  upou  all  the  factors  which  may  enter  into  the 

considering  all  .  ,  .  i        <•  i 

elements  in  de-  qucstion.  In  Massachusetts,  owmg  to  the  fact  that 
va^e^as  a  basis  HO  public-scrvice  Corporation  has  been  able  to  issue 
for  rates  Capital  stock  exccpt  for  cash  or  property,  there  has 

Mayhew  v.  Kings  County  Lighting  Company,  2  P.  S.  C.  659  (1911),  7!  per  cent; 
Wisconsin:  State  Journal  Printing  Co.  v.  Madison  Gas  and  Electric  Co.,  4  W.  R.  C.  R. 
501,  626-49  (igio);  California:  Contra  Costa  Water  Co.  v.  City  of  Oakland,  159  Cal. 
323;  113  Pac.  668  (1911);  City  of  Palo  Alto  v.  Palo  Alto  Gas  Co.,  2  Cal.  R.R.  Com. 
Dec.  300  (1913);  Massachusetts:  Haverhill  Petitions,  Board  of  Gas  and  Electric  Light 
Comrs.,  Twenty-eighth  Annual  Report,  p.  41. 

^  Massachusetts:  Acts  1913,  chap.  784,  sec.  14;  California:  Stats.  1911,  ist  Extra. 
Sess.,  chap.  14,  sees.  47  and  70,  as  amended  hy  Stats.  1913,  chap.  339;  Wisconsin: 
Laws  1905,  chap.  362;  Stats.  1911,  sec.  1797-20;  Laws  1907,  chap.  499,  Stats.  1911, 
sees.  1797M-S  to  1797M-7,  1797M-16,  1797M-42. 

2  There  is  another  theory  of  valuation  which  has  sometimes  been  called  the  cost-of- 
replacement  theory,  which  considers  the  cost  of  replacing  to-day,  not  the  same  prop- 
erty, but  property  which  will  perform  the  same  service:  there  is  also  a  "fair-exchange 
value,"  which  is  based  largely  on  what  the  property  may  be  expected  to  earn.  How- 
ever useful  these  theories  may  be  in  cases  of  purchase  or  condemnation,  they  are  of 
very  little  use,  it  seems  to  us,  in  fixing  a  basis  for  rates.  See  Missouri  Rate  Cases,  230 
U.S.  474,  :i2>  Sup.  Ct.  975  (1913);  Public-Service  Gas  Co.  v.  Board  of  Pubhc-Utility 
Comrs.,  84  N.J.  Law,  463,  87  Atl.  651  (1913);  Fuhrmann  v.  Cataract  Power  and  Con- 
duit Co.,  3  P.  S.  C.  (2d  bist.  N.Y.)  656  (1913). 

^  See  Report  St.  Louis  Public-Service  Commission,  to  the  Municipal  Assembly  of 
St.  Louis,  on  the  Southwestern  Tel.  &  Tel.  Co.  (October  14,  1913),  pp.  9,  12-13. 

*  See  Report,  Public-Utilities  Commission  (Connecticut,  19 12),  pp.  xxvn  and 
xxxvi. 


PUBLIC-SERVICE  CORPORATION  BONDS  221 

not  been  developed  any  particular  theory  or  system  of  valuation.^ 
In  New  York  State,  the  Second  District  Commission  in  the  Buffalo 
Gas  case  ^  discussed  various  theories  of  valuation.  After  stating 
the  objections  to  these  theories,  Chairman  Stevens  said:  "It  is 
a  question  whether  any  of  these  theories  can  be  applied  alone  to 
a  given  case  and  produce  a  result  of  substantial  equity  and 
justice."  The  Wisconsin  Commission  in  a  recent  case  said:  "The 
value  of  a  plant  and  its  business  that  is  ultimately  found  to  be  fair 
and  equitable  under  the  circumstances  may  not  agree  either  with 
the  original  cost  or  with  the  cost  of  reproduction,  but  in  most  in- 
stances it  is  likely  to  be  found  at  some  figure  in  the  neighbor- 
hood of  these  costs."  '  The  California  Commission  in  certain  cases 
disallowed  reproduction  cost  where  that  cost  was  in  excess  of  the 
original  cost."* 

In  another  case,  the  California  Commission  laid  emphasis  on  the 
importance  of  considering  all  elements  of  value.^  In  ascertaining 
the  value  of  the  property  of  the  Stockton  Terminal  &  Eastern 
Railroad  Company,  the  California  Commission  considered  the 
following  matters:  (i)  Organization,  construction,  and  operation; 
(2)  stocks  and  bonds;  (3)  revenues  and  expenses;  (4)  original  cost, 
as  defined;  (5)  reproduction  value,  as  defined;  (6)  present  value,  as 
defined.  ^  In  the  case  of  new  properties,  emphasis  may  be  laid,  per- 
haps, on  original  cost;  in  the  case  of  properties  built  many  years 
ago,  it  is  more  difficult  to  determine  original  cost  and  more  natural 
to  take  cost  of  reproduction  as  a  guide  in  determining  value.  To 
sum  up,  the  best  modem  practice  favors  considering  all  proper  ele- 
ments of  value  as  a  basis  for  rates.  The  origin  and  development  of 
the  business,  the  conditions  under  which  the  plant  was  constructed, 
the  actual  investment  made,  the  present  value  of  the  plant,  and  any 
other  factors  having  a  bearing  in  any  given  case  should  be  considered. 

On  the  question  of  valuation  when  finally  appealed  to  the  United 

^  See  Haverhill  Gas  Light  case,  Twenty-eighth  Annual  Report,  Board  of  Gas  and 

Electric  Light  Comrs.,  pp.  41-60. 

2  Buffalo  Gas  Co.  v.  City  of  Buffalo,  3  P.  S.  C.  (2d  Dist.  N.Y.)  553,  at  632  (1913)- 
^  City  of  Milwaukee  v.  The  IMilwaukee  Electric  Railway  &  Light  Co.,  10  W.  R.  C. 

R.  I  (1912). 

*  San  Jose  v.  The  Pacific  Tel.  &  Tel.  Co.,  3  Cal.  R.R.  Com.,  Dec.  720  (1913)- 

*  Re  Water  Rates  and  Service  in  the  County  of  San  Diego,  2  Cal.  R.R.  Com.  Dec. 
464,  at  511-12  (1913). 

®  2  Cal.  R.R.  Com.  Dec.  777,  779  (1913). 


222      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

States  Supreme  Court,  the  court  held,  in  Smyth  v.  Ames,^  that  "the 
^^  .   J  ^  basis  of  all  calculations  as  to  the  reasonableness  of 

United  States 

Supreme  Court  rates  to  be  charged  by  a  corporation  maintaining  a 
as  a  basis  highway  Under  legislative  sanction  must  be  the  fair 

or  rates  value  of  the  property  being  used  by  it  for  the  conven- 

ience of  the  public.  And  in  order  to  ascertain  that  value,  the  origi- 
nal cost  of  construction,  the  amount  expended  in  permanent  im- 
provements, the  amount  and  market  value  of  its  bonds  and  stock, 
the  present  as  compared  with  the  original  cost  of  construction,  the 
probable  earning  capacity  of  the  property  under  particular  rates 
prescribed  by  statute,  and  the  sum  required  to  meet  operating  ex- 
penses, are  all  matters  for  consideration,  and  are  to  be  given  such 
weight  as  may  be  just  and  right  in  each  case.  We  do  not  say  that 
there  may  not  be  other  matters  to  be  regarded  in  estimating  the 
value  of  the  property."  In  the  Minnesota  Rate  Cases, ^  it  held  that 
"the  ascertainment  of  that  value  is  not  controlled  by  artificial 
rules.  It  is  not  a  matter  of  formulas,  but  there  must  be  a  reasonable 
judgment  having  its  basis  in  a  proper  consideration  of  all  relevant 
facts."  In  these  latter  cases,  the  court  spoke  of  the  cost  of  reproduc- 
tion as  an  important  element  in  determining  value,  but  it  warned 
against  accepting  results  w^hich  depend  on  mere  conjecture. 

All  the  various  details  of  the  valuation  question,  we  will  not 
Methods  of  attempt  to  discuss  in  this  chapter.  We  will  simply 
certain^details  considcr  briefly  some  of  the  most  important  and  in- 
of  valuation        tercstiug  phases.  Among  these  may  be  mentioned :  — 

(i)  Should  land  be  valued  on  the  same  basis  as  other  parts  of  the 
property?  . 

(2)  In  estimating  cost  of  reproduction  new  of  plant,  should 
present  unit  prices  be  taken  or  average  unit  prices  for  a  series  of 
years? 

(3)  In  estimating  cost  of  reproduction  new,  should  present  con- 
ditions of  construction  other  than  the  present  cost  of  material  and 
labor  be  taken  or  should  there  be  taken  the  conditions  under  which 
the  plant  actually  was  constructed? 

(4)  Should  depreciation  be  deducted  either  from  original  cost 
or  cost  of  reproduction  new? 

^  169  U.S.  466,  at  546. 

'  Hughes,  J.,  m  the  Minnesota  rate  cases,  230  U.  S.  352, 434,  ^3  Sup.  Ct.  729  (1913). 


PUBLIC-SERVICE  CORPORATION  BONDS  223 

(5)  How  much  should  be  allowed  for  overhead  charges  in  con- 
struction, for  development  expense,  for  going  concern  value,  or  for 
franchise  value  ? 

The  practice  of  some  of  the  leading  commissions  in  these  matters 
will  further  illustrate  their  attitude  toward  valuation. 

In  valuing  land  for  the  purpose  of  fixing  rates,  commissions  gen- 
erally use  the  present  value  of  land.^  In  New  York  State,  the  Com- 
mission for  the  First  District  has  tried  to  avoid  Methods  of 
making  the  community  pay  rates  which  are  higher  in  ^^^^^'^s  ^^^"^ 
proportion  to  the  growth  and  increase  in  activities  of  the  commun- 
ity itself.  It  has  treated  the  estimated  average  annual  increase  in 
the  value  of  land  of  the  company  as  income,  but  in  this  the  commis- 
sion has  been  overruled  by  the  courts.^  In  California,  in  the  Tono- 
pah  &  Tide  Water  Railroad  case,  the  commission  has  expressed  the 
opinion  that  the  basis  of  return  on  real  property  shall  be  even  less 
than  ''the  fair  average  market  value  of  similar  land  in  the  vicinity, 
including  the  unearned  increment."  ^  The  general  rule,  however, 
is  for  state  commissions  to  take  the  present  value  of  land. 

In  the  leading  cases  on  this  question  taken  to  the  United  States 
Supreme  Court,  the  theory  of  the  present  value  of  land  as  a  basis 
for  rates  has  been  held  as  the  proper  one.    In  the 
Minnesota  Rate  Cases,^  the  court  allowed  a  value  for   Supreme  Court 
lands  equal  to  the  fair  average  market  value  of  similar   ^^^  ^^  "^^^  ^° 
land  in  the  vicinity,  but  did  not  allow  for  various  special  costs  in- 
volved in  acquiring  the  particular  land  wanted. 

On  the  question  of  whether  in  figuring  cost  of  repro-    g^g^  practice 
duction  new,  prices  at  the  time  of  making  the  valu-   ^^vors  use  of 

.  ,  °  average  prices 

ation  or  average  prices  for  a  series  of  years  should  in  estimating 
be  taken,  the  best  opinion  seems  to  favor  the  use  of  duction'^new' 
average  unit  prices  for  a  series  of,  say,  five  years.^    °^  ^^^°' 

1  In  New  York  (2d  Dist.),  Fuhrmann  v.  Cataract  Power  &  Conduit  Co.,  3  P.  S.  C. 
(2d  Dist.  N.Y.)  656  (1913).  In  Wisconsin,  Superior  Commercial  Club  v.  Superior 
Water,  Light  &  Power  Co.,  11  W.  R.  C.  R.  704  (1912).  The  United  States  Supreme 
Court  has  adopted  this  view.  Minnesota  Rate  Cases;  230  U.S.  352,  33  Sup.  Ct.  729 
(1913).  The  St.  Louis  Commission  has  abandoned  its  original-cost  theory,  when  deal- 
ing with  land.  {Report,  St.  Louis  Public  Service  Commission,  to  the  Municipal  Assem- 
bly of  St.  Louis  on  the  Southwestern  Tel.  &  Tel.  Co.  (October  14, 1913),  pp.  9-10.) 

*  See  Kings  County  Lighting  Co.  v.  Willcox,  156  N.Y.  App.  Div.  603  (1913). 

»  3  Cal.  R.R.  Com.  Dec.  205  (1913).       *  230  U.S.  352,  33  Sup.  Ct.  729. 

5  Petition  of  Berlin  Elec.  Light  Co.  d  al.,  3  N.H.  P.  S.  C.  174,  196  (1913);  City  of 
Milwaukee  v.  Milwaukee  Elec.  Ry.  &  Light  Co.,  10  Wis.  R.  C.  R.  i,  107,  108. 


224     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

The  use  of  present  unit  costs  is  likely  to  be  unfair  if  the  date 
of  valuation  happens  to  be  at  a  time  of  unusually  high  or  low 
prices.^ 

The  question  of  whether  present  or  actual  conditions  of  con- 
struction should  be  taken  as  the  basis  of  estimating  the  cost  of 
Pavement  reproduction  new  has  come  up  so  far  principally  in 

over  mains  |.]^g  form  of  whether  allowance  should  be  made  for 

pavement  over  mains.  Where  such  pavement  has  not  been  part  of 
the  actual  cost  of  installing  property,  the  best  practice  refuses  to 
allow  anything  for  this  item.^ 

As  far  as  the  position  of  the  United  States  Supreme  Court  goes, 
there  are  certain  statements  of  the  court  which  seem  to  indicate  an 
„  . .      ,  opinion  that  allowance  should  be  made  for  pavement 

Position  of  .  ,  '^ 

United  States      ovcr  mams.    In  Willcox  V.  Consolidated  Gas  Com- 

Supreme  Court  o  , ,  . .  .    ,  i  •      i 

pany,"*  the  question  was  not,  however,  squarely  raised, 
and  this  decision  is  hardly  to  be  taken  as  indicating  the  final  opinion 
of  the  court  on  this  point.  Where  a  corporation  has  not  been  at  any 
actual  expense  to  pave  over  mains,  and  where  it  has  not  expected 
any  allowance  to  be  made  for  this  item,  —  in  which  its  expectation 
would  be  different  from  that  in  the  case  of  land,  —  the  commis- 
sions, it  seems  to  us,  have  no  good  ground  for  allowing  anything  for 
this  item  in  estimating  value  as  a  basis  for  rates. 

In  the  matter  of  deducting  depreciation  from  the  value  of  the 
property  upon  which  a  public-service  corporation  shall  be  allowed 
^       ,    ,         to  earn  a  fair  return,  the  rules  and  decisions  of  the 

General  rule  .     .  -,       r      ^  •  i        i  i 

for  treatment  commissious  and  of  the  courts  vary  considerably, 
fn  esTi'matLg  °  Generally,  the  commissions  and  courts  deduct  accrued 
fair  va  ue  depreciation  from  the  estimated  reproduction  cost  or 

from  the  original  cost  when  making  use  of  these  factors  in  valuations 

1  For  difficulties  involved  in  the  use  of  present  unit  prices,  see  Buffalo  Gas  Co.  v. 
City  of  Buffalo,  3  P.  S.  C.  (2d  Dist.  N.Y.)  553  (1913). 

2  New  York,  ist  Dist.  (sustained  by  New  York  Court  of  Appeals) :  Kings  County 
Lighting  Co.,  People  ex  rel.,  v.  Willcox,  210  'N.Y.  479  (1914);  New  York,  2d  Dist.: 
Buffalo  Gas  Co.  v.  City  of  Buffalo,  3  P.  S.  C.  (2d  Dist.  N.Y.)  553  (1913);  New  Jersey: 
In  re  Rates  of  the  Public  Service  Gas  Co.,  i  N.J.  B.  P.  U.  C.  433  (1912);  Wisconsin: 
City  of  Milwaukee  v.  The  Milwaukee  Electric  Ry.  &  Light  Co.,  10  W.  R.  C.  R.  i,  116 
(191 2);  Cahfomia:  City  of  Palo  Alto  v.  Palo  Alto  Gas  Co.,  2  Cal.  R.R.  Com.  Dec.  300 
(1913);  City  of  San  Jose  v.  The  Pacific  Tel.  &  Tel.  Company,  3  Cal.  R.R.  Com.  Dec. 
720,  727  (1913);  United  States  District  Court:  Des  Moines  Gas  Co.  v.  City  of  Des 
Moines,  199  Fed.  Rep.  204  (1912). 

^  212  U.S.  19  (1909). 


PUBLIC-SERVICE  CORPORATION  BONDS  225 

for  the  purpose  of  fixing  rates.  ^  Where  companies  have  created 
depreciation  reserves  invested  in  plant  and  working  capital,  the 
Wisconsin  Commission,  in  a  recent  case,  has  deducted  depreciation 
from  cost  new  and  added  the  depreciation  reserves. ^ 

It  has  been  argued  that  a  plant  that  has  depreciated  still  may 
render  as  efficient  service  as  when  it  was  new,^  and  that  therefore 
no  depreciation  need  be  deducted.   It  has  also  been   Treatment  of 
contended  that  the  necessity,  in  the  absence  of  a   underTarkTus 
depreciation  fund,  for  stockliolders  maintaining  the   circumstances 
plant  prevents  the  investment  from  becoming  diminished.^  Again, 
an  effort  has  been  made  to  distinguish  between  cases  where  proper 
allowance  for  depreciation  in  effect  has  been  returned  to  the  owners 
—  in  which  cases,  accrued  depreciation  should  be  deducted  —  and 
cases  where  sums  set  aside  for  depreciation  are  allowed  to  accumu- 
late for  the  benefit  of  a  sinking  fund  —  in  which  cases  no  deduction 
for  depreciation  should  be  made.^ 

Perhaps  the  best  statement  of  the  proper  treatment  of  deprecia- 
tion in  estimating  value  as  a  basis  for  rates  is  given  by  the  New 
Hampshire  Public-Service  Commission  in  the  case  of   ^ 

^  Summary  of 

the  Berlin  Electric  Light  Company:^  "We  do  not  depreciation 
hold  that  the  full  amount  of  depreciation  should  in 
every  case  be  deducted  from  the  cost  of  reproduction.  It  is  merely 
one  of  the  facts  to  be  considered  in  making  a  finding  of  fair  value. 
It  stands  in  the  same  category  as  original  cost  of  physical  proper- 
ties, other  necessary  early  expenditures,  present  reproduction  cost 
of  physical  properties,  and  other  facts  concerning  which  inquiry  is 
made,  all  of  which  should  be  determined  as  accurately  as  possible, 

^  United  States  Supreme  Court:  Knoxville  v.  Knoxville  Water  Co.,  212  U.S.  i,  29 
Sup.  Ct.  148  (1909);  Minnesota  Rate  Cases:  230  U.S.  352  (1913) ;  New  York  Commis- 
sion for  1st  Dist.,  upheld  on  this  point  by  the  Appellate  Division  of  the  New  York 
Supreme  Court:  People  ex  rel.  King's  County  Lighting  Co.  v.  Will  cox,  156  New  York 
App.  Div.  603  (1913) ;  see  also  2  P.  S.  C.  (ist  Dist.  N.Y.)  659;  California:  City  of  Palo 
Alto  V.  Palo  Alto  Gas  Co.,  2  Cal.  R.R.  Com.  Dec.  300  (1913). 

2  City  of  Milwaukee  v.  Milwaukee  Electric  Ry.  &  Light  Co.,  10  W.  R.  C.  R.  i 
(191 2);  Superior  Commercial  Club  v.  Duluth  Street  Railway  Co.,  11  W.  R.  C.  R.  i 
(1912). 

*  Edwards  et  al.  v.  The  Helena  Light  &  Ry.  Co.,  Sixth  Annual  Report,  Raihroad 
Commission  of  Montana,  p.  194  (1913). 

*  City  of  Whitewater  v.  Whitewater  Electric  Light  Co.,  6  W.  R.  C.  R.  132,  138 
(1910). 

6  Fuhrmann  v.  Cataract  Power  &  Conduit  Co.,  3  P.  S.  C.  (2d  Dist.  N.Y.)  656  (1913). 

*  See  In  re  Sale  of  Berlin  Electric  Light  Co.,  3  N.H.  P.  S.  C.  174,  194.  iQS- 


226      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

but  none  of  which  have  a  uniform  fixed  value  in  each  case.  There 
may  be  cases  where  plants  well  conceived  and  well  managed  have 
suffered  depreciation  which  in  fact  represents  a  part  of  the  cost  of 
developing  the  business  to  a  point  where  a  fair  return  can  be  se- 
cured. In  other  cases,  as,  for  example,  where  adequate  returns 
have  been  received  to  afford  a  fair  return  and  to  maintain  a  depreci- 
ation reserve,  but  have  been  entirely  paid  out  in  dividends,  the 
entire  amount  may  properly  be  deducted  from  present  cost  of  re- 
production in  coming  to  the  final  conclusion  as  to  the  fair  value. 
Between  these  two  extremes  the  proper  course  will  vary  according 
to  the  circumstances  in  each  case.  But  in  every  case  it  is  desirable 
to  determine,  for  the  purpose  of  consideration,  the  full  depreciation 
as  accurately  as  possible."  The  whole  problem  of  allowing  for 
depreciation  is  a  problem  in  cost  accounting.  The  methods  through 
which  depreciation  may  be  determined  are  almost  numberless. 
In  the  Knoxville  Water  case  ^  and  in  the  Minnesota  Rate  Cases, 
the  United  States  Supreme  Court  has  held  that  in 

United  States  .  .  ,  ... 

Supreme  Court    cstimatmg  the  cost  of  reproduction  new,  the  extent  of 

epreaa  ion    ^^g^jj^g  depreciation  should  be  shown  and  deducted. 

In  estimating  value  as  a  basis  for  rates,  an  allowance  almost 

always  is  made  for  overhead  charges.  This  item  commonly  is  used 

to  include  the  cost  of  engineering  and  superintend- 

AUowance  for  ,  ~      .  ,      .  . 

overhead  cncc,  coutractor  s  profit,  mterest  durmg  construction, 

charges  in  esti-       i         i  i  i  •      ^  • 

mating  value  as  legal  and  general  expenses,  company  organization, 
a  basis  for  rates  ^^-^^^  ^^^^  insurance,  cxpeuscs  of  promotion,  and  con- 
tingencies. Although  there  have  been  cases  in  which  the  necessity 
for  any  separate  allowance  for  overhead  charges  has  been  ques- 
tioned,^  the  general  tendency  is  to  make  a  fairly  liberal  allowance 
for  this  item.  Commissions  and  courts  vary  greatly  not  only  as  to 
the  amount  to  be  allowed,  but  also  as  to  the  method  of  computing 
allowances.  Wherever  the  actual  expenditures  for  overhead  charges 
can  be  proved  from  the  records  of  the  company  or  otherwise,  they 
will  form  the  basis  for  allowance  under  this  head.^  The  company 

*  Knoxville  v.  Knoxville  Water  Co.,  212  U.S.  i,  29  Sup.  Ct.  148  (1909). 

2  Cedar  Rapids  Gas  Light  Co.  v.  Cedar  Rapids,  144  la.  426,  120  N.W.  960  (1909), 
223  U.S.  655.  See  also  Cumberland  Tel.  &  Tel.  Co.  v.  City  of  Louisville,  187  Fed. 
Rep.  637,  646,  647  (1911). 

*  See  Report,  St.  Louis  Public- Service  Commission,  to  the  Municipal  Assembly  of 
St.  Louis  on  rates  for  electric  light  and  power  (February  17,  1911),  p.  50. 


PUBLIC-SERVICE  CORPORATION  BONDS  227 

will  not  be  permitted,  however,  by  means  of  a  contract  with  the 
construction  company  to  impose  unnecessary  and  unreasonable 
overhead  charges.'-  Where  actual  expenditures  for  overhead 
charges  cannot  be  ascertained,  —  a  situation  which  prevails  in  a 
majority  of  cases,  —  commissions  resort,  as  a  rule,  to  a  percent- 
age allowance  upon  the  cost  of  items  included  in  the  general  term 
"reproduction  cost."  The  New  York  Commission,  First  District, 
has  allowed  in  one  case  fifteen  per  cent  for  engineering  incidentals 
and  similar  items  on  costs  where  these  charges  properly  would 
apply,  and  ten  per  cent  for  general  contractor's  profit. ^  The  Wis- 
consin Commission  in  one  case  has  allowed  on  the  total  inventory 
reproduction  cost  five  per  cent  for  engineering  and  superintendence, 
four  per  cent  for  interest  during  construction,  and  three  per  cent 
for  legal  expenses,  organization,  casualties,  omissions,  and  other 
similar  items; '  in  another  case,  instead  of  allowing  a  total  of  twelve 
per  cent  for  overhead  charges,  the  Wisconsin  Commission  has  al- 
lowed a  total  of  fifteen  per  cent.^  The  California  Commission  has 
considered  as  an  adequate  allowance  for  overhead  charges  in  the 
case  of  a  gas  company  fifteen  per  cent  on  the  reproduction  cost  of 
the  plant. ^  In  determining  the  proper  amount  of  overhead  charges, 
the  commissions  should  use,  as  in  all  other  questions  of  valuation, 
discretion  in  each  individual  case. 

Another  question  to  be  determined  in  estimating  value  is  whether 
any  allowance  should  be  made  for  going-concern  value.  Going- 
concern  value  in  rate  cases  generally  is  considered  to    .  „ 

.  /^  .  Allowance  for 

be  equivalent  to  the  uncompensated  losses  mcurred  m   development 
the  development  of  the  business.    It  is  often  called   gomg-^a)n- 
development  expense.  It  should  not  be  confused  with   ^^^^  ^^^"^ 
good-will,  which  has  no  place  in  estimating  the  value  of  a  pubhc- 
service  corporation  under  monopohstic  conditions.    The  Massa- 
chusetts Board  of  Gas  and  Electric  Light  Commissioners  has 
refused  to  consider  going-concern  value  in  rate  cases.^  As  a  general 

1  In  re  Application  of  N.Y.  &  North  Shore  Traction  Co.,  3  P.  S.  C.  (ist  Dist.  N.Y.) 
63  (1912). 

"^  Mayhew  v.  Kings  County  Lighting  Co.,  2  P.  S.  C.  (ist  Dist.  N.Y.)  659  (1911). 

»  City  of  Ripon  v.  Ripon  L.  &  W.  Co.,  5  W.  R.  C.  R.  i,  13  (1910). 

*  City  of  Milwaukee  v.  Milwaukee  Gas  Light  Co.,  12  W.  R.  C.  R.  441  (1913). 

s  City  of  Palo  Alto  v.  Palo  Alto  Gas  Co.,  2  Cal.  R.R.  Com.  Dec.  300  (1913). 

'  See  Re  Haverhill  Petitions,  Twenty-eighth  Annual  Report,  Gas  &  Electric  Light 
Com'rs,  pp.  41-50  (1912). 


228      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

rule,  however,  commissions  and  courts  recognize  the  fact  that 
development  expense  or  going-concern  value  should  be  reimbursed 
to  the  company  either  by  an  increase  in  the  fair  value  on  which  the 
return  is  allowed  or  by  an  increase  in  income  to  enable  amortization 
of  early  losses.^  Sometimes  commissions  have  refused  to  make  any 
allowance  for  going-concern  value  because  of  the  insufiiciency  of 
the  evidence  offered,-  and  sometimes  on  the  ground  that  early 
deficits  have  been  recouped  out  of  subsequent  profits,'  or  on  the 
fact  that  consciously  or  unconsciously  the  going-concern  value  has 
been  included  in  the  valuation  of  the  physical  plant.'*  As  stated 
above,  however,  the  best  practice  favors  a  reasonable  allowance  for 
going-concern  value.^ 

The  last  question  to  be  discussed  in  connection  with  detailed 
methods  of  valuation  is  that  of  franchise  value.  It  is  provided  by 
Franchise  statutc  in  Wisconsiu:  ''In  determining  the  value  of 

value  ^]^g  property  of  a  public-service  corporation  or  any 

person  furnishing  service  to  the  public  for  the  purpose  of  this  act, 
no  franchise  to  be  a  corporation  and  no  franchise  or  privilege 
granted  to  such  corporation  by  the  State  or  municipality  shall  be 
appraised,  fixed,  or  considered  at  any  greater  sum  or  value  than  the 
sum  paid  therefor  into  the  pubHc  treasury  of  the  State  or  munici- 
pality granting  the  same."  ®  The  above  statute  embodies  the  best 
and  in  fact  the  almost  universal  modern  opinion  as  to  the  treatment 
of  franchise  value  in  rate  cases.  In  spite  of  a  few  cases  where, 
through  failure  to  distinguish  between  rate  cases  and  purchase 

^  See  Kings  County  Lighting  Co.  v.  Willcox,  210  N.Y.  479  (March  24,  1914); 
141  N.Y.  Sup.  677.  City  of  Palo  Alto  v.  Palo  Alto  Gas  Co.,  2  Cal.  R.R.  Com.  Dec. 
300  (1913). 

2  See  Bachrach  v.  Consolidated  Gas,  etc.,  Co.  Public  Service  Com.  of  Maryland 
Reports,  vol.  iv,  pp.  39-46  (1913). 

^  Union  City  v.  Union  Heat,  Light  and  Power  Company,  February  7, 1914,  Indiana 
Public  Service  Commission  (5  Rate  Research,  69). 

*  Indiana  Public-Service  Commission  (5  Rate  Research,  69).  See  Des  Moines  Gas 
Co.  V.  City  of  Des  Moines,  199  Fed.  Rep.  204  (191 2). 

^  See  especially,  for  interesting  discussions  of  this  subject,  and  of  other  intangible 
elements  which  may  enter  into  rate  cases,  Fuhrmann  v.  Cataract  Power  and  Conduit 
Co.,  3  P.  S.  C.  (2d  Dist.  N.Y.)  656;  Superior  Commercial  Club  v.  Superior  Water,  etc., 
Co.,  10  Wis.  R.  C.  R.  704;  City  of  Milwaukee  v.  The  IMilwaukce  Electric  Railway  and 
Light  Co.,  10  Wis.  R.  C.  R.  i;  City  of  Green  Bay  v.  Green  Bay  Water  Co.,  11  Wis. 
R.  C.  R.  236. 

*  Laws  ZQii,  chap.  593,  sec.  i7S3-iS- 


PUBLIC-SERVICE  CORPORATION  BONDS  229 

cases,  an  allowance  has  been  made  for  franchise  value, ^  it  is  now 
generally  recognized  that  the  value  of  a  franchise  is  created,  not 
by  the  company  which  owns  it,  but  by  the  community  served. 
Hence,  it  is  unjust  to  compel  the  community  to  pay  higher  rates 
on  account  of  a  privilege  conferred  by  the  community  itself. ^ 

We  have  discussed  above  the  various  factors  usually  taken  into 
consideration  in  estimating  a  fair  value  of  the  property  upon  which 
a  fair  rate  of  return  shall  be  allowed.   No  hard-and-   „  , 

Summary  of 

fast  rules  can  be  laid  down.    The  very  purpose  of  valuation  as  a 

Vjacic  for  r3.tcs 

having  state  public-service  commissions  with  dis- 
cretionary powers  is  to  make  possible  the  determination  of  each 
case  on  its  own  merits  —  with  due  regard,  of  course,  to  certain 
general  principles.  If  it  were  possible  to  make  rigid  rules  to  apply 
in  all  cases,  it  would  be  possible  to  embody  those  rules  in  statutes 
enforcible  simply  by  the  courts.  Aside  from  its  impossibiUty,  how- 
ever, a  system  of  valuation  based  on  rigid  rules  would  defeat  the 
principal  purpose  of  regulation ;  that  is,  to  give  a  square  deal  to  the 
pubUc  and  to  the  corporation.  In  the  words  of  the  Public  Service 
Commission,  Second  District,  New  York,  as  expressed  in  the 
Buffalo  Gas  Case,^  February  4,  1913:  "What  is  called  the  fixing  of 
the  value  of  the  property  in  the  public  service  for  the  purpose  of 
rate-making  is  not  a  fixing  of  value  in  any  proper  sense  of  that 
word  as  it  is  correctly  used  in  our  language.  It  is  a  determination 
of  what,  under  all  the  facts  and  circumstances  of  the  case,  is  a  just 
and  equitable  amount  upon  which  the  return  allowed  to  the  cor- 
poration is  to  be  computed.  If  the  time  the  determination  is  made 
happens  to  be  at  or  near  the  time  the  plant  is  put  in  operation,  the 
investment  or  original  cost  may  be  the  predominant  factor.  If  the 
time  of  determination  is  remote  from  the  time  of  investment,  tlie 
factor  of  appreciation  or  diminution  in  values  arising  from  changes 
in  costs  of  labor  and  materials  may  enter  largely  into  the  result.  If 

*  See,  for  example,  Consolidated  Gas  Co.  v.  City  of  New  York,  157  Fed.  Rep.  849, 
872;  Willcox  V.  Consolidated  Gas  Co.,  212  U.S.  19,  48  (1909). 

^  See  Fuhrmann  v.  Buffalo  General  Electric  Co.,  3  P.  S.  C.  (2d  Dist.  N.Y.)  739 
(1913);  In  re  Haverhill  Petitions,  Twenty-eighth  Annual  iJe/ior/,  Massachusetts  Board 
of  Gas  and  Electric  Light  Com'rs.  (1912),  pp.  41, 50;  Re  Rates  of  the  Public  Service  Gas 
Co.,  I  N.J.  B.  P.  U.  C.  433  (1912);  Public  Service  Gas  Co.  v.  Board  of  Public  Utility 
Commissioners,  84  N.J.  463;  87  Atl.  651  (1913);  Cedar  Rapids  Gas  Light  Co.  v.  City  of 
Cedar  Rapids,  223  U.S.  655,  669  (1912). 

»  Buffalo  Gas  Co.  v.  City  of  Buffalo,  3  P.  S.  C.  (ad  Dist.  N.Y.)  SS3  (1913)- 


230     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

the  plant  is  unreasonably  disproportionate  in  size  to  the  service 
required  of  it,  the  cost  of  reproduction  new  cannot  be  the  sole  test. 
If  the  actual  investment  has  been  reckless  and  extravagant,  the 
owners  should  bear  the  loss  and  not  the  public.  If  the  general  scale 
of  prices  and  values  in  the  community  has  been  increased  or  dimin- 
ished since  the  plant  was  built,  the  owners  may  be  fairly  called 
upon  to  share  the  general  diminution;  and  on  the  other  hand,  may 
justly  demand  a  share  in  the  general  appreciation  to  which  the 
existence  of  their  property  has,  it  may  fairly  be  assumed,  con- 
tributed at  least  its  proportionate  share."  This  completes  what  we 
have  to  say  on  the  subject  of  valuation  as  a  basis  for  rates. 

We  have  discussed  commission  regulation  of  public-service 
Commission  corporations  in  the  matters  of  monopoly,  service,  and 
Stalizrtion  Tatcs.  We  wiU  now  take  up  briefly  the  poHcy  of  the 
and  accounts  commissions  in  the  matters  of  capitalization  and 
accounts. 

Control  of  capitalization  is  exercised  through  approval  or  dis- 

,    .  approval  of  the  issue  of  securities.  In  Massachusetts,^ 

commissions  to  Ncw  York,^  Wisconsin,^  California,^  and  many  other 
approve  issue  States,  the  commissions  have  authority  to  approve 
o  secunties        ^^  disapprove  the  issue  of  bonds  and  stocks. 

In  New  York  State,  the  statutes  provide,  in  substance,  that  pub- 
lic-service corporations  may  issue,  when  necessary,  stock,  bonds, 
notes,  or  other  evidences  of  indebtedness  payable  at  more  than 
twelve  months  from  the  date  of  issue:  — 

(i)  For  the  acquisition  of  property. 

(2)  For  construction,  completion,  extension  or  improvement  of 
their  facilities. 

(3)  For  the  improvement  or  maintenance  of  their  service. 

(4)  For  the  discharge  or  lawful  refunding  of  their  obligations  or 

^  Ads  igo6,  chap.  463,  part  3,  sees.  103,  104,  107,  108,  109,  in;  Acts  igo8,  chap. 
636;  Acts  iQog,  chap.  485;  Acts  igio,  chap.  536;  Acts  igij,  chap.  784,  sees.  15  and  16; 
Acts  igiJ,  chap.  764;  Acts  1914,  chap.  742,  sees.  35, 38, 39, 40, 41, 42, 43, 44;  Acts  igi4, 
chap.  671.  See  Fall  River  Gas  Works  Co.  v.  Board  of  Gas  and  Electric  Light  Com'rs. 
214  Mass.  529  (1913). 

2  Laws  igio,  chap.  480,  sees.  55,  69,  loi  (as  amended  by  Laws  igio,  chap.  673). 
See  also  Laws  igi2,  chap.  289;  Laws  1914,  chap.  220. 

'  Stats,  igii,  chap.  85,  sec.  1753  as  amended  by  Laws  igij,  chap.  598  and  chap. 
773,  sec.  70. 

*  Stats.  1911,  Extra.  Sess.,  p.  18,  as  amended  by  Stats,  igij,  chaps.  339  and  553; 
Henning's  Gen.  Laws  of  California  (1914),  vol.  5,  p.  1558,  act  3775,  sec.  52. 


PUBLIC-SERVICE  CORPORATION  BONDS  23 1 

for  the  reimbursement  of  moneys  actually  expended  from  income 
or  from  other  moneys  not  obtained  from  the  issue  of  securities. 

The  order  of  the  commission  authorizing  such  issue  shall  state 
the  amount  of  securities  and  the  purposes  to  which  the  securities 
or  the  proceeds  are  to  be  applied;  that  the  money, 
property,  or  labor  to  be  procured  or  paid  for  by  the   securities  in 
issue  of  such  securities  is  or  has  been,  in  the  opinion   sttTelran 
of  the  commission,  reasonably  required  for  the  pur-   example  of  the 

•^  •*  '■  best  practice 

poses  specified  in  the  order;  and  that  such  purposes 
are  not,  in  whole  or  in  part,  reasonably  chargeable  to  operating 
expenses  or  to  income.  The  commission  is  forbidden  to  allow  the 
capitalization  of  franchises  beyond  the  actual  amount  paid  there- 
for to  the  State  or  to  any  subdivision  thereof.  The  commission 
cannot  approve  capitalization  of  a  corporation  formed  by  merger 
to  an  amount  in  excess  of  the  combined  capitalization  of  the  com- 
panies merged,^  nor  can  it  approve  the  capitalization  of  any  con- 
tract for  consolidation  or  lease.  For  the  issue  of  notes  and  similar 
obHgations,  payable  in  less  than  one  year,  the  consent  of  the 
commission  is  unnecessary.^  These  provisions  are  typical  of  the 
best  practice  in  the  States  where  the  commissions  have  authority 
over  the  issue  of  securities. 

Many  people  have  held  that  if  service  and  rates  are  regulated, 
there  is  no  necessity  for  regulating  the  issue  of  securities.  This  rea- 
soning does  not  take  into  account  the  interests  of   „,.  ^ 

Wisdom  of 

mvestors.   In  the  words  of  Dr.  Maltbie,  of  the  New   commission 
York    Public-Service    Commission,    First    District:   the  issue  of 
"The  State  owes  a  duty  towards  investors  as  well  as   ^^^""^'^^ 
it  does  towards  shippers  and  passengers.   Further,  proper  regula- 
tion of  securities  will  ultimately  affect  rates  and  service.    It  may 
not  immediately,  but  in  the  long  run  better  service  and  lower  rates 
will  be  given  by  corporations  that  are  upon  a  sound  financial  basis 
than  by  those  having  a  great  overcapitalization  and  unsound  financ- 
ing," ^  Undoubtedly  it  is  true  that  overcapitalization  has  a  tend- 

'  See,  however,  Rockland  Light  and  Power  Case,  cited  on  page  214,  note  3. 

*  As  an  illustration  of  the  practical  working  of  these  provisions  see :  In  the  Matter 
of  the  Application  of  the  New  York  and  Ontario  Power  Co.,  i  P.  S.  C.  R.  (2d  Dist.  N.Y.) 
453  (1909);  People  ex  rel.  Binghamton  L.  H.  &  P.  Co.  v.  Stevens,  203  N.Y.  7  (191 1). 

*  Quoted  by  J.  M.  Eshleman  in  "Should  the  Public  Utilities  Commission  have  Power 
to  Control  the  Issuance  of  Securities,"  State  Regulation  of  Public  Utilities,  p.  160. 


232      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

ency  to  lead  either  to  poorer  service  or  to  higher  rates.  Even  where 
the  commissions  have  full  authority  over  service  and  rates,  it  is 
much  more  difficult  for  them  to  make  this  control  effective,  if  they 
are  dealing  with  a  corporation  attempting  to  earn  an  attractive 
return  on  an  excessive  amount  of  securities.  The  strongest  argu- 
ment, however,  for  the  control  of  the  issue  of  securities  by  commis- 
sions is  the  protection  of  investors.^ 

The  only  other  important  phase  of  regulation  of  public-service 
corporations  by  state  commissions  is  the  supervision  of  accounts 
Supervision  and  the  ordering  of  reports.  There  are  provisions  for 
and  ordering  ^^^  regulation  of  accounts  in  upwards  of  one  half  the 
of  reports  States.    Usually  the  commission  has  authority  to 

establish  a  system  of  uniform  accounts.  In  Indiana,  the  commis- 
sion must  prescribe  accounting  practices.^  In  many  States  provi- 
sion is  made  for  special  depreciation  accounts.  In  practically  all  the 
States  the  public-service  corporations  must  make  regular  periodic 
reports  to  the  commissions. 

It  is  to  be  remembered  that  all  orders  of  the  commissions  in  the 

various  States  are  subject  to  a  greater  or  less  degree  of  review  by 

the  courts.   In  Colorado  ^  and  in  California,^  by  stat- 

Judicial  review  i       r      t  ^  i      •  <•     i  •     • 

of  commission  utc,  the  nndmgs  and  conclusions  of  the  commissions 
on  questions  of  fact  are  made  final  and  are  not  subject 
to  judicial  review.  In  several  other  States  the  limits  within  which 
judicial  decisions  may  operate  are  laid  down  by  statute.  In  Rhode 
Island,^  Connecticut,^  California,'  and  several  other  States,  orders 
of  the  commission  may  be  suspended  pending  review  by  the  court. 
"The  right  of  appeal  and  judicial  review  is  statutory  and  therefore 
subject  to  the  will  of  the  legislature  within  the  constitutional  limita- 
tions of  due  process  and  equal  protection  of  the  law  with  respect 

^  Aside  from  the  direct  power  of  commissions  to  approve  or  disapprove  the  issue  of 
new  securities,  there  is  a  form  of  control  which  consists  simply  in  making  public  the 
facts  about  the  issue  of  new  securities  and  the  purposes  for  which  they  are  issued. 
This  is  the  method  in  the  main  recommended  by  the  Railroad  Securities  Commission 
appointed  by  President  Taft  in  1910. 

^  Acts  1913,  chap.  76,  sees.  15-17. 

'  Colorado,  Session  Laws,  1913,  chap.  127,  sec.  52. 

*  Stats.  1911,  ist  Extra.  Session,  chap.  14,  sec.  67;  Henning's  General  Laws  of  Cali- 
fornia (1914),  act  3775>  sec.  67,  p.  1566.  1 

*  Laws  1912,  chap.  795,  sec.  35.  '  Public  Acts  IQJI,  chap.  128,  sec.  33. 

^  Laws  1911,  Extra.  Session,  chap.  14,  sec.  68;  Henning's  General  Laws  of  California 
(1914),  act  3775,  sec.  68,  p.  1566. 


PUBLIC-SERVICE  CORPORATION  BONDS  233 

to  the  preservation  of  property  and  contract  rights."  ^  This  finishes 
what  we  have  to  say  on  the  regulation  of  public-service  corpora- 
tions by  state  commissions. 

There  has  been  recently  a  considerable  movement  in  some  places 
in  favor  of  regulation  by  the  local  communities  instead  of  by  the 
State.2  There  have  been  advanced  three  arguments:  state  m.  local 
(i)  That  the  local  community  is  better  able  to  judge  regulation 
of  its  own  needs  than  is  the  State;  (2)  that  local  self-sufficiency  or 
home-rule  should  not  be  weakened ;  (3)  that  local,  instead  of  state, 
control  will  make  easier  purchase  and  operation  of  a  public-service 
corporation  by  the  municipahty.  In  Los  Angeles,  California,  under 
the  combined  authority  of  the  City  Council  and  the  local  Board  of 
Public  Utilities,  there  has  been  worked  out  a  reasonably  satisfac- 
tory system  of  local  regulation.^  In  view  of  the  fact  that  so  many 
pubhc-service  corporations  operate  in  more  than  one  municipahty, 
local  regulation,  it  seems  to  us,  is  Hkely  to  lead  to  the  same  conflict 
between  different  municipaUties  and  between  municipahties  and 
the  State  as  prevails  in  the  case  of  steam  railroads  between  the  dif- 
ferent States  and  between  States  and  the  Federal  Government. 
Local  regulation,  moreover,  is  Hable  to  be  too  provincial.  Exclusive 
and  more  or  less  uniform  regulation  ^  of  local  public  utilities  by  the 
State  seems  to  us,  on  the  whole,  the  best  solution. 

^  Oscar  L.  Pond,  Methods  of  Judicial  Review  in  Relation  to  Effectiveness  of  Commis- 
sion Control  in  State  Regulation  of  Public  Utilities  (Philadelphia,  1914),  p.  64. 

2  See  Report  of  D.  F.  Wilcox,  Chairman  of  Committee  on  Franchises  of  the  National 
Municipal  League,  November  13, 1913,  and  Report  of  Conference  of  American  Mayors, 
held  in  Philadelphia,  November  13  and  14, 1914  (Commercial  and  Financial  Chronicle, 
vol.  99,  p.  1510). 

2  See  State  Regulation  of  Public  Utilities,  pp.  108-18. 

*  There  has  been  drawn  up  recently  and  submitted  to  a  great  many  different  inter- 
ests a  so-called  "Uniform  Utilities  Bill."  The  main  provisions  of  this  bill  are  as  fol- 
lows: (i)  State  commissions  to  have  power  to  prevent  needless  competition  through 
control  of  the  issue  of  certificates  of  public  convenience  and  necessity;  (2)  state  com- 
missions shall  control  consolidation;  (3)  all  franchises  granted  to  pubUc  utilities  which 
do  not  provide  for  possible  purchase  by  the  municipality  shall  be  indeterminate;  (4) 
municipaUties  shall  have  the  right  to  purchase  pubHc  utilities,  in  case  of  disagree- 
ment as  to  price,  at  a  value  to  be  determined  by  the  state  commissions;  (5)  state 
commissions  shall  enforce  adequate  service  and  shall  have  power  to  investigate  ser- 
vice on  their  own  motion;  (6)  state  commissions  shall  have  full  power,  subject  to 
law,  to  prescribe  rates;  (7)  they  shall  have  supervision  of  the  issue  of  new  securities; 
(8)  they  shall  prescribe  uniform  systems  of  accounts.  (Draft  Bill  for  the  regulation 
of  public  utiUties  with  documents  relating  thereto,  authorized  to  be  pubhshed  by  the 
National  Civic  Federation,  October  23,  1914). 


234     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Related  to  the  question  of  regulation  of  local  public-service 
corporations  is  the  question  of  municipal  ownership  and  operation. 
Municipal  Many  of  the  franchises  granted  in  recent  years  by 

ownership  municipalities  to  public-service  corporations  in  the 

United  States,  as  shown  earlier  in  this  chapter,  provide  for  purchase 
of  the  property  of  the  public  utility  by  the  municipality.  In  Massa- 
chusetts,^ Illinois,^  Wisconsin,^  and  other  States,  definite  provision 
is  made  in  the  statutes  for  the  purchase  of  public-service  corpora- 
tions for  municipal  ownership  and  operation. 

In  Massachusetts  there  were  on  June  30,  1913,  thirty-six  munici- 
pally owned  and  operated  lighting  plants."*  Of  these  thirty-six 
. .    .  plants,  however,  seventeen  were  distributing  plants 

Municipal  ^  i        i     •  rr^i  i  i- 

operation  in  Only  and  boUght  their  product.    The  results  of  mum- 

Massachusetts  .        -I  i-  •       TV/r  1  iJ.      -L  'J  'J 

cipal  operation  m  Massachusetts  have  varied  consid- 
erably. In  many  cases  the  community  has  obtained  its  street  light- 
ing at  lower  figures  than  otherwise  obtainable,  and  has  received  a 
good  quality  of  commercial  service  at  reasonable  rates.  In  all  the 
municipal  plants  in  Massachusetts  the  maintenance  of  a  deprecia- 
tion fund,  usually  three  per  cent,  is  compulsory.  Any  deficit  in- 
curred in  the  operation  of  the  plants  is  made  up  from  taxes.  Owing 
to  the  almost  limitless  number  of  factors  which  enter  into  the  ques- 
tion of  the  success  or  failure  of  municipal  operation,  it  is  almost  im- 
possible to  say  what  the  true  results  have  been.  There  is  nothing 
to  show,  however,  that  in  most  cases  municipal  operation  has  not 
worked  out  reasonably  well. 

There  has  been  a  considerable  spread  of  municipal  ownership  and 
operation  of  lighting  plants  outside  of  Massachusetts.  In  191 2, 
„    . .    ,  the  total  number  of  municipal  central  electric  stations 

Municipal  .  .  ^  . 

ownership  and  m  thcUmted  Statcs  was  1562  as  against  3659  stations 
wh"re\n"the  privately  owucd  and  operated.^  When  we  try  to 
Unite  States  SiYnve  at  the  comparative  results  of  municipal  and 
private  operation  throughout  the  United  States,  we  find  the  same 

^  Ads  1914,  chap.  742,  sees.  92  to  125. 

*  Senate  Bill  no.  538,  approved  June  26,  1913;  Laws  191 3,  p.  455. 

*  Laws  1907,  chap.  499,  sees.  1797M-74  to  1797M-86,  as  amended  by  Laws  1909, 
chap.  213,  and  by  Laws  1911,  chaps.  12  and  596,  and  by  Laws  191 3,  chap.  160. 

*  See  Twenty-ninth  Annual  Report,  Board  of  Gas  and  Electric  Light  Commission- 
ers, pp.  209-12. 

^  Department  of  Commerce,  Bureau  of  the  Census,  Bulletin  124  (Washington, 
1914),  p.  14. 


PUBLIC-SERVICE  CORPORATION  BONDS  235 

difficulties  as  in  Massachusetts.  The  differences  in  the  compara- 
tive size  of  the  municipal  and  private  stations,  in  the  character  of 
the  community  served,  in  the  proportions  of  Hghting  and  of  power 
business,  in  the  amounts  charged  to  depreciation  and  in  the  meth- 
ods of  keeping  accounts,  make  a  comparison  of  financial  results  at 
present  of  very  Uttle  significance.  If  we  attempt  to  compare  serv- 
ice, we  will  find  almost  always  a  difference  of  opinion.  The  munici- 
pal electric  lighting  plant  in  Detroit  is  referred  to  usually  as  a 
success.  It  has  been  in  operation  since  1895,  and,  except  the  plant 
in  Chicago,  is  the  largest  municipal  lighting  plant  in  the  United 
States.  Detroit  has  secured  its  lighting  on  terms  which  compare 
favorably  with  the  prices  charged  by  private  companies  in  other 
cities.  The  plant  is  managed  by  a  PubHc  Lighting  Commission  in 
much  the  same  way  as  a  board  of  directors  would  conduct  the  affairs 
of  a  well-managed  private  corporation.^  The  municipal  electric 
light  plants  in  South  Norwalk,  Connecticut,  Allegheny,  Pennsyl- 
vania, and  Chicago,  Illinois,  all  have  been  cited  as  confirming  the 
wisdom  of  municipal  ownership  and  operation. ^  Municipal  opera- 
tion of  gas  works  in  Philadelphia,  on  the  other  hand,  proved  a  fail- 
ure and  was  abandoned.^  The  results  of  an  investigation  of  the 
commission  on  public  ownership  and  operation  of  the  National 
Civic  Federation,  published  in  1907,  show  that  it  is  possible  to  ob- 
tain two  opinions  almost  diametrically  opposite  on  the  questions 
of  service,  rates,  and  general  success  or  failure  of  municipal  as 
against  private  plants. 

In  Great  Britain  and  Germany,  there  has  been  a  much  greater 
development  of  municipal  ownership  and  operation  than  in  the 
United  States.  In  both  countries  the  properties  usu-   Municipal 
ally  have  been  operated  without  loss  (after  making  Cpe^radoif in"^^ 
due  allowances)  and  in  some  cases  with  considerable   Europe 
profit.   Where  changes  have  been  made  during  the  past  few  years 
from  private  to  municipal  operation,  they  have  resulted,  in  most 
cases,  in  better  service.  The  service  given,  however,  is  very  much 
less  developed  than  that  furnished  under  private  management  in 

^  John  Fairlie,  Essays  in  Municipal  Administration,  New  York,  1908,  pp.  219-29. 

2  E.  W.  Bemis,  "Municipal  and  Private  Operation  of  Public  Utilities,"  Report  to 
the  National  Civic  Federation,  Commission  on  Public  Ownership  and  Operation 
(New  York  1907),  vol.  i,  part  i,  pp.  165, 169, 175. 

'  Ibid.,  p.  149,  and  Fairlie,  p.  271. 


236     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

the  United  States.^  Municipal  operation  of  street  railways  in 
Great  Britain,  particularly  in  Glasgow,  Scotland,  and  in  Liverpool 
and  Leeds,  England,  has  proved  on  the  whole  satisfactory.  It  has 
resulted  in  extension  of  service  and  usually  in  a  reduction  of  fares. 
It  has  also  resulted  favorably  from  a  financial  point  of  view.^  It  is 
to  be  remembered  that  municipal  operation  of  tramways  in  Great 
Britain  has  been  developed  for  the  most  part  under  fairly  good 
political  conditions.  Among  the  well-known  municipal  gas  plants 
in  Great  Britain  may  be  mentioned  those  in  Birmingham,  Man- 
chester, Leicester,  and  Glasgow.  London  has  several  municipal 
electric  plants  which  appear  to  have  shown  a  fair  degree  of  suc- 
cess.^ Outside  of  Great  Britain,  we  find  in  Vienna  the  largest  mu- 
nicipal street  railway  system  in  the  world  and  also  municipal  gas 
works;  in  Bologna,  Leghorn,  Padua,  and  Pisa,  Italy,  we  find  munic- 
ipal gas  plants.'*  On  the  whole,  the  service  furnished  by  these 
municipal  utilities  in  Vienna  and  in  Italy  has  been  at  least  fair, 
although  less  developed  than  the  service  furnished  under  private 
operation  in  the  United  States.  The  rates  charged  have  not  been 
particularly  low  for  the  service  furnished.  The  financial  results 
appear  to  be  fairly  satisfactory.^  To  sum  up,  perhaps  it  is  fair  to 
say  that  municipal  operation  of  public  utilities  in  Europe  has  given 
reasonably  satisfactory  results.  The  political  conditions  have  been 
more  favorable  than  in  the  United  States. 

Purchase  and  operation  of  public  utilities  by  municipalities  in 
Municipal  ^^^  United   States   involve   fewer   difficulties   than 

ownership  of       pubUc  Ownership  and  operation  of  the  steam  railroads, 

public  utilities       ^  ... 

more  feasible  Under  our  present  fairly  satisfactory  system  of  state 

sary  than  regulation  of  local  utilities,  however,  municipal  own- 

ow^'ne^rTip^of  crship  ^  of  thcsc  properties  seems  even  less  necessary 

railroads  ^j^^j^  government  ownership  of  railroads. 

*  Fairlie,p.  272. 

2  "Municipal  and  Private  Operation  of  Public  Utilities,"  Report  to  National  Civic 
Federation,  Commission  on  Public  Ownership  and  Operation  (New  York,  1907),  vol.  i, 
part  I,  pp.  263  to  297.  See  also  Ibid.^  vol.  11,  part  2,  "  British  Tramways." 

^  Fairlie,  p.  301. 

<  Ibid.,  pp.  325-28  and  341-49-  ^  IbU.,  pp.  325-28  and  348-49. 

*  For  several  interesting  articles  on  municipal  ownership  and  on  the  relation  of  the 
public  to  public-service  corporations,  see  "Public  Policies  as  to  Municipal  Utilities," 
in  the  Annals  of  the  American  Academy  of  Political  and  Social  Science,  vol.  Lvn, 
no.  146  (January,  1915)- 


PUBLIC-SERVICE  CORPORATION  BONDS  237 

We  have  confined  our  discussion  of  public-service  corporations 
so  far  mostly  to  street  railway,  gas,  and  electric  light  and  power 
companies  operating  in  local  communities.    There  is   Relation  of 
another  large  class  of  public-service  corporations —   compame'sTo 
the  telephone  companies.  These  companies  do  usually   ^^^  p^^^^ 
an  interstate  business.    The  question  of  the  relation  of  these  cor- 
porations to  the  public  is  a  perplexing  one.  The  telephone  business 
is  in  its  very  nature  of  a  pecuUarly  monopolistic  character.    We 
ourselves  feel  that  the  final  solution  will  be  either  ownership  and 
operation  by  the  Federal  Government  or  operation  of  the  proper- 
ties as  a  unit  under  a  federal  license  or  charter  —  with  the  same 
sort  of  regulation  as  to  service,  rates,  and  capitalization  as  is  pro- 
vided in  the  authority  of  state  commissions  over  public-service 
corporations  located  wholly  within  one  State. 

A  recent  report  of  the  Postmaster-General  of  the   ^^  ^^^  ^^  ^^ 
United  States  ^  made  the  following  suggestions:  —        Postmaster- 

(i)  That  Congress  declare  a  government  monopoly   telegraph  and 

„      °,  ,  1,11  T  1  telephone  lines 

over  all  telegraph  and  telephone  Imes  and  over 
certain  other  means  of  communication. 

(2)  That  Congress  acquire  by  purchase  at  appraised  value  the  com- 
mercial telephone  network,  except  the  farmer  lines. 

(3)  That  Congress  authorize  the  Postmaster-General  to  issue,  in  his 
discretion  and  under  such  regulations  as  he  may  prescribe,  revoc- 
able licenses  for  the  operation  by  private  individuals,  associations, 
companies,  and  corporations  of  the  telegraph  service  and  such 
parts  of  the  telephone  service  as  may  not  be  acquired  by  the 
Government. 

The  report  states  that  the  United  States  is  the  only  one  of  the 
leading  nations  which  has  left  to  private  enterprise  the  ownership 
and  operation  of  telegraph  and  telephone  facihties. 

It  is  undeniable  that  the  telephone  business  comes  as  near  to 
what  may  be  called  a  legitimate  government  mo- 
nopoly as   any  public-service  business  still  in  the   exckfsfve^egu- 
hands  of  private  owners.    Furthermore,  there  would   Fed°e^amovern- 
be  certain  economies  in  the  operation  of  telephone   ment  of 

.  .  .  ,      ,  .  telephone  hnes 

hnes  m  connection  with  the  postal  service  —  such  as 

the  use  of  the  present  real  estate  of  the  postal  service  and  the  use 

1  Government  Ownership  of  Electrical  Means  of  Communication,  63d  Cong.,  2d  Sess., 
Doounent  no.  339,  p.  13. 


238      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

of  stamps  for  the  collection  of  charges.  If  these  properties  are  not 
taken  over  and  operated  by  the  Federal  Government,  or  taken  over 
by  the  Government  and  operated  by  private  corporations  under 
licenses,  there  should  be  estabUshed,  it  seems  to  us,  exclusive 
federal  regulation  of  the  private  corporations. 

Another  class  of  properties  where  the  question  of  possible  federal 
control  enters  in  are  the  water-power  developments  on  navigable 
Water-power  strcams.  Undoubtedly  the  Federal  Government  has 
developments  ^^le  right  to  cxcrcise  over  these  properties  any  degree 
of  control  that  it  sees  fit.  On  the  other  hand,  the  States  where  any 
particular  water-power  developments  may  be  situated  are  likely 
to  feel  that  regulation  belongs  to  them.  There  were  introduced  in 
the  Sixty-third  Congress  various  bills  dealing  with  this  subject.  A 
suggestion  which  has  in  it  many  reasonable  features  for  a  settle- 
ment of  this  question  is  as  follows :  — 

(i)  PubHc  ownership,  federal  or  state,  of  the  site  and  of  the 
water-power. 

(2)  Lease  to  a  private  corporation  for  operation. 

(3)  Control  over  competition,  service,  and  rates  by  some  com- 
mission. 

It  seems  to  us  that  federal  ownership  of  the  site  and  water-power, 
lease  to  a  private  corporation  for  operation  and  control  over  com- 
petition, service,  and  rates  by  some  federal  commission,  would  be  a 
reasonable  solution  in  the  cases  of  corporations  doing  an  interstate 
business,  and  a  similar  programme  with  the  State  substituted  for 
the  National  Government  in  the  cases  of  corporations  doing  a  busi- 
ness wholly  within  one  State.  The  same  danger  of  conflict  of 
authority,  however,  together  with  the  fact  that  the  Federal  Gov- 
ernment has  ultimate  control  over  navigable  streams,  may  make  it 
desirable  to  have  the  whole  matter  considered  a  concern  of  the 
Federal  Government.  It  is  to  be  hoped  that  the  settlement  of  this 
problem  will  not  be  such  as  to  discourage  the  development  of 
water-power. 

In  the  entire  matter  of  the  relation  of  public-service  corporations 
^     J    ,   .        to  the  public,  there  is  likely  to  be  from  time  to  time 

Broad  relation  '  -^ 

of  pubiic-ser-  more  or  less  of  a  see-saw  between  abuse  of  opportu- 
tionsTo^he^  mties  by  private  interests  and  over-severity  or  nar- 
peopie  rowness  on  the  part  of  the  pubUc  or  its  representa- 


PUBLIC-SERVICE  CORPORATION  BONDS  239 

tives.  Regulation  by  commissions  may  swing  like  a  pendulmn 
from  a  policy  of  undue  interference  and  repression  to  a  policy  of 
undue  subservience  to  corporation  influence.  It  is  well  to  remem- 
ber, as  Mr.  Vail,  president  of  the  American  Telephone  and  Tele- 
graph Company,  has  said  in  substance,  that  the  prosperity  and 
even  the  existence  of  the  public-service  corporation  is  dependent 
in  the  last  resort  on  the  good-will  and  acquiescence  of  the  public.^ 
Only  on  the  basis  of  giving  good  service  at  reasonable  rates,  obey- 
ing the  laws  and  recognizing  pubUc  opinion  can  private  ownership 
of  public-service  corporations  endure. 

In  an  attempt  to  make  clear  certain  principles  governing  the 
safety  of  public-service  corporation  bonds,  we  have   Debt  and  eam- 
discussed  earlier  in  this  chapter  the  relation  of  debt  to    service^" 
property  or  assets.  We  wish  now  to  say  a  few  words   corporations 
about  earnings. 

In  the  matter  of  gross  earnings,  public-service  corporations  have 
shown  a  marked  degree  of  growth  and  stabiHty  over  a  long  series  of 
years:  for  instance,  whereas  the  gross  earnings  of         .^.^  ^^ 
steam  railroads,  operating  100,726  miles  of  road,  for   gross  earnings 

T-i-^  ,  I       ^  r    ^,^     of  public 

the  year  ending  December  31,  1908,  —  the  nrst  lull  service 
year  after  the  panic  of  1907,  —  showed  a  loss  of  11.90  '^^^^^^^  ^°°^ 
per  cent  compared  with  the  previous  year,^  the  gross  earnings  of 
forty  representative  public-service  corporations  for  the  same  period 
showed  an  increase  of  about  7.15  per  cent.^  Again,  railroads  oper- 
ating 249,726  miles  of  road  showed  for  the  calendar  year  1914  a 
loss  in  gross  earnings  of  6.79  per  cent  compared  with  1913,^ 
whereas  forty  representative  public-service  corporations  showed 
for  the  same  period  an  increase  of  about  4.13  per  cent.^  The  experi- 
ence of  most  public-service  corporations  has  been  that  of  a  more  or 
less  steady  increase  in  gross  earnings  through  good  times  and  bad.^ 

1  See  Address  of  Theodore  N.  Vail,  President,  at  the  opening  of  the  Annual  Con- 
ference of  the  Bell  Telephone  System,  New  York,  October,  1913. 

^  Commercial  and  Financial  Chronicle,  "The  Financial  Review"  (Annual,  1915), 
p.  106. 

'  Figures  from  Messrs.  N.  W.  Harris  &  Co.,  Inc. 

*  Commercial  and  Financial  Chronicle,  "The  Financial  Review"  (Annual,  1915), 
p.  106. 

^  Figures  from  Messrs.  N.  W.  Harris  &  Co.,  Inc.,  in  letter  dated  March  30,  1915. 

8  During  the  current  year  (1915),  the  "jitneys"  have  cut  into  the  earnings  of  street 
railways  somewhat  seriously.    Our  opinion  is  that  the  "jitneys "  ultimately  will  serve 


240     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

In  the  matter  of  net  earnings,  we  give  below  some  figures  for  net 

earnings  per  one  hundred  dollars  of  outstanding  securities  of  gas 

and  electric  companies  in  most  of  the  large  cities 

Net  earnings  .       ,  i        •  i       <-  r 

of  the  Umted  States  as  compared  with  figures  for 
railroads  and  industrial  concerns:  — 

Net  earnings  per  one  hundred  dollars  of  outstanding  securities 
jgo2-ii,  inclusive 

Gas  and  electric  companies S8.45 

Industrials 7.79 

RailrGads 4.25 

As  illustrating   the  freedom   from   dangerous  fluctuations  in 

net  earnings,   the  following  figures  giving  the  average  annual 

amount  of  securities  in  receivers'   hands  per  one 

Net  earnings         i  ,       i     ,    i,  r  ^^  •  •  i      • 

and  receiver-       hundred  dollars  of  outstandmg  securities  durmg  a 
^  ^^^  period  of  thirty  years,  from  1882  to  191 1  inclusive, 

may  be  of  interest :  — 

Gas  and  electric  companies $  .37 

Railroads i  .84 

Industrials 2.07 

The  above  figures  show  a  far  better  record  as  to  receiverships  for 
gas  and  electric  companies  than  for  railroads  and  industrials.^ 

We  will  refer  briefly  to  the  question  of  receiverships  and  reor- 
ganizations of  pubUc-service  corporations.  The  same  problems  of 

readjusting  capitalization  and  exchanging  old  securi- 
and  reorgaoi-       tics  for  ncw  as  wc  found  in  the  cases  of  steam  railroads 

have  arisen  in  the  cases  of  pubhc-service  corporations. 
Interesting  reorganizations  are  those  of  the  Michigan  Telephone 
Company  (1904),  controlUng  the  Bell  Telephone  business  in  the 
State  of  Michigan;  the  Chicago  Union  Traction  Company  (1907), 
controlling  a  large  part  of  the  street-railway  business  in  Chicago; 
the  Hudson  River  Electric  Power  Company  (1911),  controlling 
hydro-electric  plants  in  New  York  State;  and  the  Metropolitan 
Street-Railway  Company  (191 1),  controlling  most  of  the  surface 
street-railway  lines  in  New  York  City. 

principally  as  useful  feeders  rather  than  as  dangerous  competitors  of  the  street  rail- 
ways. 

1  Information  obtained  from  pamphlets  published  by  Messrs.  Henry  L.  Doherty  & 
Co.,  dated  February  20,  1913,  and  April  21,  1913. 


PUBLIC-SERVICE  CORPORATION  BONDS  24I 

The  properties  of  the  Michigan  Telephone  Company  were  sold 
at  foreclosure  to  interests  representing  the  bondholders  November 
4, 1903 .  There  had  been  default  in  interest  due  July  i ,  Reorganization 
1902,  on  $4,715,000  mortgage  bonds.  As  is  usual  in  gan  Telephone 
such  cases,  many  reasons  may  be  brought  forward  to  Company 
account  for  the  default.  In  a  general  way,  it  may  be  said  that  the 
community  served  had  grown  too  fast  for  the  company.  Rapid 
extensions  were  required,  the  rates  were  too  low  to  pay  a  fair  return 
on  the  new  capital,  and  the  physical  condition  of  the  properties 
deteriorated.  On  the  whole,  the  management  was  not  able  to  cope 
with  the  situation.  There  was,  moreover,  considerable  competition 
from  independents  —  especially  in  Grand  Rapids.  The  attitude 
of  the  public  was  unfriendly.  There  was  a  considerable  floating 
debt  held  largely  by  the  same  interests  that  controlled  the  stock. 
The  physical  properties  of  the  company  had  been  appraised  at  an 
amount  considerably  in  excess  of  the  bonded  debt.  The  price 
obtained  at  foreclosure  sale^  was  $4,100,000  —  compared  with  a 
bonded  debt  of  $5,000,000.  The  company  was  reorganized  accord- 
ing to  plan  shown  in  the  table  on  page  242. 

This  reorganization  may  be  said  to  have  been  entirely  in  the 
interests  of  the  old  bondholders.  In  December,  1909,  the  market 
value  of  the  securities  received  in  exchange  for  each  $1000  of  old 
Michigan  Telephone  5  per  cents  was,  at  the  bid  prices,  exactly 
$1300.2  Later,  about  ninety  per  cent  of  the  common  stock  of 
the  Michigan  State  Telephone  Company  was  exchanged  for 
stock  of  the  American  Telephone  and  Telegraph  Company  on 
the  basis  of  five  shares  of  the  former  for  four  shares  of  the 
latter. 

The  properties  controlled  by  the  Chicago  Union  Traction  Com- 
pany —  operating  mostly  on  the  north  and  west  sides  of  the  City 
of  Chicago  — ^  were  sold  at  foreclosure  to  a  protective  Reorganization 
committee  January  25,  1908.  Many  of  the  old  fran-  uniS  Slctfon 
chises  had  expired,  and  the  so-called  "Ninety-nine-  Company 
Year  Act"  —  which  the  companies  had  considered  gave  them  the 
right  to  operate  all  their  lines  in  the  city  of  Chicago  —  had  been 

^  Commerical  and  Financial  Chronicle,  vol.  77,  p.  1750. 

'  Bank  and  Quotation  Section  of  the  Commercial  and  Financial  Chronicle,  Decem- 
ber 4,  1909,  pp.  31  and  48. 


242      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 


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PUBLIC-SERVICE  CORPORATION  BONDS  243 

held  by  the  United  States  Supreme  Court  ^  to  be  not  a  franchise. 
There  began  a  long  fight,  led  by  ex-Mayor  Dunne,  for  municipal 
ownership  and  operation.  During  this  fight  the  physical  condition 
of  the  properties  deteriorated  badly.  The  holding  company  —  the 
Union  Traction  Company  —  was  grossly  overcapitalized  and  was 
justly  unpopular.  Receivers  were  appointed  for  the  North  Chicago 
Street-Railroad  Company  and  the  West  Chicago  Street-Railroad 
Company,  the  two  leading  operating  companies,  in  April,  1903.2 
At  foreclosure  sale,^  the  price  obtained  for  the  combined  properties 
was  $2,090,000,  compared  with  a  total  debt  of  $33,490,126.  The 
companies  were  reorganized  in  accordance  with  plan  shown  on 
page  244. 

This  reorganization  was  in  the  interests,  partly  of  the  old  secur- 
ity-holders, but  more  in  the  interests  of  the  public.  Perhaps  its 
primary  object  was  to  make  possible  the  giving  by  the  successor  of 
the  old  companies  of  adequate  street-railway  service  to  the  city  of 
Chicago.  The  old  security-holders  have  not  under  all  the  circum- 
stances fared  particularly  well  up  to  date. 

The  properties  of  the  Hudson  River  Electric  Power  Company 
and  its  seven  controlled  companies  were  sold  at  foreclosure  sale 
August  29,  1911.  The  troubles  of  the  old  companies.  Reorganization 
besides  the  complicated  nature  of  their  relations  to  one   of  the  Hudson 

.  .  River  Electric 

another,  were  due  mamly  to  unexpected  engmeermg   Power  Com- 
problems  which  resulted  in  greatly  increased  costs   cont^ro^iied'  ^ 
and  finally  in  overcapitalization.  There  were  in  addi-   ^"b-compames 
tion  these  difficulties:  inadequate  control  of  the  water  flow  and 
inadequate  steam  reserve,  low-priced  contracts,  poor  earnings,  and 
lack  of  strong  financial  backing.    Receivers  were  appointed  in 
November,  1908.^  The  price  obtained  at  foreclosure  ^  —  including 
the  property  of  the  Madison  County  Gas  and  Electric  Company, 
sold  August  31,  1911 — was  $7,675,000,  compared  with  a  total 
debt  of  the  old  companies  of  $11,965,667.    The  properties  were 
reorganized  in  accordance  with  plan  given  on  page  245. 

^  Act  approved  February  6,  1865  (amending  an  act  approved  February  14,  1859, 
and  an  act  approved  Februar>'  21,  186 1),  entitled  "An  Act  concerning  horse  railways 
in  the  City  of  Chicago."  See  Blair  v.  City  of  Chicago,  etc.,  201  U.S.  400;  26  Sup.  Ct.  427. 

^  Poor's  Manual  of  Railroads  (1907),  p.  1085. 

'  Commercial  atid  Finaticial  Chronicle,  vol.  86,  p.  284. 

*  The  Corporation  Service  (1910),  p.  1735. 

^  Commercial  and  Financial  Chronicle,  vol.  93,  p.  592. 


244        AIvIERICAN  AND  FOREIGN  INVESTMENT  BONDS 


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PUBLIC-SERVICE   CORPORATION   BONDS 


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246     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

This  reorganization,  like  that  of  the  Michigan  Telephone  Com- 
pany, was  entirely  in  the  interests  of  the  old  bondholders.  There 
was  made,  however,  a  sharp  distinction  between  the  old  bonds  of 
the  Hudson  River  Electric  Company,  the  Hudson  River  Electric 
Power  Company,  and  the  Madison  County  Gas  and  Electric  Com- 
pany, as  compared  with  the  old  bonds  of  the  other  five  companies. 

The  lines  of  the  Metropolitan  Street-Railway  Company  —  con- 
trolUng  most  of  the  surface  street-railway  traffic  in  New  York  City 
—  were  sold  under  foreclosure  December  29,  191 1.  As  is  usual  in 
such  cases,  the  causes  of  the  trouble  were  many  and  various.  There 
was  great  congestion  of  traffic;  and  owing  to  the  building  of  the 
Reorganization  subways,  the  traffic  had  to  be  moved  under  changed 
Sn  slrS-Rlif "  conditions.  Through  the  hberal  giving  of  transfers, 
way  Company  ^j^g  average  fare  had  been  reduced  beyond  the  point 
of  profit.  Added  to  these  causes  were  heavy  cost  of  repair  work 
and  increased  expenses  in  other  directions.  There  had  been  also 
gross  over- capitalization,  waste  of  assets,  and  mismanagement. 
The  physical  condition  of  many  of  the  lines  became  deplorable. 
Receivers  were  appointed  "  about"  September  27,  1907. ^  At  fore- 
closure sale  2  the  price  obtained  for  the  property  represented  by 
the  old  5%  bonds  was  $10,000,000,  and  for  that  covered  by  the 
refunding  4%  bonds,  $2,010,000,  or  a  total  of  $12,010,000.  This 
compared  with  a  total  debt  held  by  the  public  before  reorganiza- 
tion of  $53,585,000.  The  properties  were  reorganized  in  accord- 
ance with  the  plan  shown  on  page  247. 

This  reorganization  was  a  good  deal  like  many  steam-railroad  re- 
organizations. There  was  an  effort  to  recognize  all  interests  —  in- 
cluding those  of  the  old  stockholders.  As  in  most  steam-railroad 
reorganizations,  the  stockholders  were  assessed  to  furnish  new 
capital. 

It  is  to  be  noted  that  in  the  two  street-railway  reorganizations 
treated  above,  the  total  debt  after  reorganization  was 

Summary  of  •  i        i  i  ^  i     r  •        •  t 

four  reorgani-      considerably  greater  than  before  reorgamzation.    In 
the  case  of  the  New  York  Railways  Company,  how- 
ever, a  large  part  of  the  new  debt  was  represented  by  bonds  the 

^  Plan  and  Agreement  for  the  Reorganization  of  the  Metropolitan  Street-Railway 
Company,  p.  2. 
*  Commercial  and  Financial  Chronicle,  vol.  93,  p.  1787. 


PUBLIC-SERVICE   CORPORATION  BONDS 


247 


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248      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

interest  payments  on  which  were  conditional,  and  in  the  case  of 
the  Chicago  Railways  Company,  by  bonds  bearing  at  first  reduced 
rates  of  interest.  Both  reorganizations  sought  to  reduce  largely 
stock  capitalization.  In  the  other  two  reorganizations  discussed, 
—  that  of  the  Michigan  Telephone  Company  and  that  of  the 
Hudson  River  Electric  Power  Company  and  its  controlled  com- 
panies, —  the  debt  was  reduced  after  reorganization.  In  the  four 
reorganizations  the  principal  methods  of  raising  new  capital  were: 
Michigan  State  Telephone  Company,  sale  of  new  securities  to  old 
bondholders  and  to  bankers;  Chicago  Railways  Company,  sale  of 
new  first-mortgage  bonds  to  bankers;  Adirondack  Electric  Power 
Corporation,  sale  of  new  first-mortgage  bonds  to  bankers;  New 
York  Railways  Company,  assessment  of  certain  old  noteholders 
and  of  old  stockholders. 

In  summarizing  the  situation  of  public-service  corporations  we 
Summary  of  would  Say:  (i)  that  public-service  corporations  to-day 
pubiic-*service  ^^^  recognizcd  generally  as  regulated  monopolies;  and 
corporations  (^2)  that  the  Stability  of  the  business  and  earnings  of 
such  corporations  are  very  great. 

In  trying  to  determine  the  safety  of  any  given  issue  of  public- 
service  corporation  bonds,  many  of  the  same  considerations  prevail 
,     ,        as  in  the  case  of  steam-railroad  bonds.   A  first-mort- 

Examples  of 

strong  public-      gage  bond  of  a  street-railway,  gas,  electric  light  and 

service  corpo-  ,    1       i  i         •  i 

ration  bond  power,  or  telephone  company,  havmg  a  large  margin 
'^^^^^  of  property  above  its  debt  and  located  in  an  important 

community,  is,  other  things  being  equal,  well  secured.  Examples 
of  exceedingly  strong  pubHc-service  corporation  bond  issues  are: 
New  York  Telephone  4^%  1939,  Cleveland  Railway  5%  1931, 
Detroit  Edison  5%  1933,  and  Laclede  Gas  Light  (St.  Louis),  first 
5%  1919.  The  New  York  Telephone  4^%  bonds  are  part  of  a 
closed  mortgage  for  $75,000,000  ($3,340,750  of  which  have  been 
retired  by  sinking  fund),  and  are  secured  by  a  first  lien,  subject  only 
to  $3,483,000  underlying  or  assumed  bonds,  on  all  the  property  of  the 
company  now  owned  or  hereafter  acquired.  The  assets  of  the  com- 
pany have  been  appraised  at  from  somewhat  over  $200,000,000  to 
over  $250,000,000.  The  company  operates  the  Bell  telephone  sys- 
tem throughout  the  State  of  New  York  and  also  in  important 
territory  in  New  Jersey.  It  also  controls  valuable  lines  in  Pennsyl- 


PUBLIC-SERVICE   CORPORATION  BONDS  249 

vania.^  The  Cleveland  Railway  5%  bonds  are  part  of  an  outstand- 
ing issue  of  $5,495,000,  are  secured  by  a  j&rst  mortgage  on  all  the 
lines,  and  are  followed  by  $25,784,900  capital  stock  representing 
property. 2  The  company  operates,  under  excellent  franchise  ar- 
rangements, the  entire  street-railway  system  in  Cleveland,  Ohio.' 
The  Detroit  Edison  first  5%  bonds  are  part  of  a  closed  mortgage 
for  $10,000,000,  and  are  secured  by  a  first  lien,  direct  or  indirect,  on 
all  the  property  and  franchises  of  the  company  in  the  city  of  Detroit. 
The  replacement  value  of  the  company's  property  is  estimated 
as  somewhere  near  $31,000,000.*  The  company  does  all  the  com- 
mercial electric-lighting  and  industrial-power  business  in  Detroit, 
Michigan.^  The  Laclede  Gas  Light  first  5%  1919  bonds  are  part  of  a 
closed  first  mortgage  for  $10,000,000,  and  are  followed  by  $12,500,- 
000  junior  bonds,  by  $2,500,000  preferred  stock,  and  by  $10,700,000 
common  stock  paying  dividends  of  7%  per  annum.  The  company 
has  an  unusually  strong  franchise,  and  does  all  the  gas  business  in 
St.  Louis,  Missouri.®  It  is  to  be  remembered  that  no  issue  of  public- 
service  corporation  bonds,  or  of  any  other  kind  of  bonds,  is  perfect 
in  all  respects.  Each  issue  must  be  judged  after  taking  into  con- 
sideration all  the  factors  entering  into  its  safety. 

In  the  early  days  of  public-service  corporation  bond  issues,  con- 
servative bankers,  in  their  desire  to  make  an  issue  as  strong  as 
possible,  often  drew  up  a  financial  scheme  which  was   Financial  plan 
too  narrow  and  too  rigid.   For  instance,  many  of  the   broad,  flexible 
corporation  bond  issues  were  Hmited  in  total  amount   ^^^  ^™ 
authorized  to  a  figure  which  later  proved  to  be  entirely  inadequate 

^  See  Poor's  Manual  of  Public  Utilities  (1915),  pp.  781,  785,  and  2265,  and  Railway 
and  Industrial  Section  of  the  Commercial  and  Financial  Chronicle,  June  26,  1915, 

P-  159- 

^  In  the  valuation  of  the  property  by  Judge  Taylor,  as  a  basis  for  the  franchise 
granted  in  1909,  $3,615,844  was  allowed  for  franchise  value.  (See  Electric  Railway 
Section  of  the  Commercial  and  Financial  Chronicle,  May  22,  1915,  p.  31.) 

'  Poor's  Manual  of  Public  Utilities  (1915),  pp.  862-64,  and  Electric  Railway  Section 
of  the  Commercial  and  Financial  Chronicle,  May  22,  1915,  p.  31. 

^  Information  from  dealers.  The  company  is  having  made,  for  the  Michigan  Rail- 
road Commission,  an  appraisal  of  its  property. 

^  Poor's  Manual,  pp.  1894-97  and  2252,  and  Railway  and  Industrial  Section  of 
the  Commercial  and  Financial  Chronicle,  June  26,  1915,  pp.  147-48,  and  dealers' 
circulars. 

8  Foot's  Mamial  of  Ptiblic  Utilities  (1915),  pp.  1099-1100,  and  Railway  and  Indus- 
trial Section  of  the  Commercial  and  Financial  Chronicle,  June  26,  1915,  p.  154. 


250      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

for  the  needs  of  the  corporation.  Modem  practice  favors  an  author- 
ized issue  large  enough  to  take  care  of  all  the  legitimate  future  needs 
of  the  company,  but  limits  the  actual  issue  of  bonds  in  such  a  way 
as  to  keep  the  debt  reasonable  compared  with  the  value  of  the  prop- 
erty and  otherwise  make  secure  the  loan.  This  enables  the  corpora- 
tion to  finance  on  a  satisfactory  basis  reasonable  extensions  of  its 
plant  and  service,  and  at  the  same  time  it  protects  investors.^  In 
general,  it  may  be  said  that  the  financial  plan  of  a  public-service 
corporation  should  be  at  one  and  the  same  time  broad,  flexible, 
and  firm. 

One  thing  more  remains  to  be  said.  The  prices  of  public-service 

corporation  bonds  during  the  past  ten  or  fifteen  years,  like  the 

,    ...     prices  of  all  other  bonds,  have  shown  a  considerable 

Prices  of  public-  ... 

service  corpo-      decline.    This   decline  has  been  much  less  in  the 

ration  bonds  pit  •  ,•  i         i       i 

case  of  pubuc-service  corporation  bonds,  however, 
than  it  has  been  in  the  cases  of  state,  municipal,  and  railroad 
bonds.  Even  since  the  war,  some  of  the  very  strongest  pubHc- 
service  corporation  bond  issues,  like  New  York  Telephone  4^  per 
cents,  Cleveland  Railway  5  per  cents,  and  Detroit  Edison  5  per 
cents,  are  selling  near  the  highest  prices  at  which  they  have  ever 
sold.^  This  is  a  recognition  on  the  part  of  investors  of  the  vari- 
ous features  of  strength  and  stability  which  we  have  tried  to  point 
out  in  this  chapter. 

As  a  final  word,  we  would  say  that  the  issue  of 
wiiikigness  of  public-servicc  corporation  bonds  based  on  a  property 
to  take\1i"^  ^^^  business  which  the  bondholders  would  be  glad  to 
Pjjoperty  for        take,  if  ncccssary,  for  the  bonds  is  the  issue  which 

investors  should  be  willing  to  buy. 

^  For  further  elaboration  of  this  idea,  see  Stone  &  Webster,  Public  Service  Journal, 
August,  1914,  pp.  99-106. 

"  Some  of  the  less  well-secured  bonds,  on  the  other  hand,  and  bonds  on  some  of  the 
smaller  properties  have  shown  since  the  beginning  of  the  war  a  considerable  decline. 


CHAPTER  VII 

INDUSTRIAL  BONDS 

Industrial  bonds,  as  the  term  will  be  used  in  this  chapter, 
comprise  bonds  of  manufacturing  and  trading  con-   Definition  of 

rpms  industrial  bonds 

The  issue  of  industrial  bonds  is  a  development  mostly  of  the  past 
fifteen  years.  The  very  existence  of  a  form  of  industrial  organiza- 
tion suitable  for  public  financing  is  comparatively  Origin  and 
recent.  In  the  early  history  of  this  country,  business  oHnd^usTrid 
combinations  took  the  form  of  partnerships.^  Not  concerns 
until  1811,  when  the  New  York  Legislature  passed  a  General  Incor- 
poration Act,  did  the  movement  for  carrying  on  business  by  means 
of  the  corporation  attain  any  importance. ^  This  act  was  followed 
by  similar  legislation  in  other  States.^  At  the  beginning  of  the  nine- 
teenth century,  there  were  in  America  probably  not  more  than  one 
hundred  corporations  —  of  which  at  least  one  half  were  in  Massa- 
chusetts. By  1840,  corporations  had  multiplied  "with  a  flexibility 
and  variety  previously  unknown."  ^  Among  the  earliest  industrial 
corporations  of  importance  later,  were  the  Standard  Oil  Company 
of  Ohio  '^  organized  in  1870,  the  Westinghouse  Electric  and  Manu- 
facturing Company  ^  incorporated  in  1872,  and  Swift  &  Company,^ 

*  Robert  L.  Raymond,  in  Harvard  Law  Review,  vol.  xvi,  p.  80. 

2  Laws  of  New  York  181 3,  vol.  i,  p.  245.  (34th  Session,  chap.  Lxvn,  passed  March 
22, 181 1.)  The  first  business  corporation  in  the  United  States,  however,  was  chartered 
in  Pennsylvania  in  1768:  "The  Philadelphia  Contributionship  for  Insuring  Houses 
from  Loss  by  Fire."  {Laws  of  Pa.  chap,  dlxxvi.)  See  Harvard  Law  Review,  vol.  n, 
p.  165. 

'  Public  Acts  of  Connecticut  1836-43,  chap.  Lxm,  p.  49,  approved  June  10,  1837. 
Laws  of  Michigan  1837,  no.  cxxi,  approved  March  22,  1837.  Until  1851,  no  corpora- 
tion could  be  organized  in  Massachusetts  without  a  special  act  of  the  legislature.  A 
general  law  governing  the  organization  and  conduct  of  corporations  created  by  special- 
act  was  passed  in  1808.  {Stats.  1808,  chap.  65.)  See  Report  of  the  Committee  on  the 
Corporation  Laws  (1903),  p.  16.  P.  F.  Hall,  The  Massachusetts  Business  Corporation 
Law  of  I  go  3  (Boston,  1908),  p.  i. 

*  Francis  Lynde  Stetson,  in  Atlantic  Monthly,  vol.  ex,  pp.  31-32. 

*  Poor's  Manuul  of  Industrials  (1913),  p.  1615. 

*  Ibid.  (19 14),  p.  1112.  ^  Ibid.  (1914),  p.  955. 


252      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

incorporated  in  1885.  The  combination  in  one  form  or  another  of 
the  interests  of  indi\idual  corporations  was  a  natural  step  from  this. 
Between  1899  and  1902,  the  movement  attained  large  proportions. 
During  this  period  the  American  Can  Company,  the  American 
Woolen  Company,  the  International  Harvester  Company  of  New 
Jersey,  the  United  Fruit  Company,  and  the  United  States  Steel 
Corporation  ^  were  formed  by  combining  the  business  of  many 
other  corporations.  Such  units  as  these  were  large  enough  to  need 
financial  assistance  from  the  pubHc  and  important  enough  to  appeal 
to  the  public  with  chance  of  success.  In  19 10,  according  to  Poor's 
"Manual  of  Industrials,"  there  were  outstanding  for  the  account 
of  manufacturing  and  miscellaneous  companies  bonds  amounting 
to  $2,585,694,207  and  stock  amounting  to  $8,233,035,721,  a  total 
capitalization  of  $10,818, 729, 928. ^ 

In  discussing  industrial  bonds,  the  first  great  difference  which 
strikes  one  between  such  bonds  and  practically  all  other  classes  of 
corporation  bonds  is  the  greater  degree  of  fluctuation 
nature  of  Ae  in  the  busincss:  that  is,  whereas  the  gross  business  of 
brmanufactur-  steam  railroads  is  likely  to  fall  off  in  periods  of  de- 
ing  and  trading    prcssion  f rom  five  to  fifteen  per  cent  and  the  business 

concerns  *•  ,  •      ,.   ,  , 

of  street-railway,  gas,  or  electric  hght  and  power 
concerns  varies  in  times  of  general  depression  from  a  small  de- 
crease to  an  increase,  say,  between  five  and  ten  per  cent,  the  pro- 
fits of  industrial  concerns  at  such  times  are  likely  to  show  a  decHne 
often  of  between  twenty  and  fifty  per  cent.  We  give  in  the  tables 
on  pages  253-55  the  item  corresponding  most  nearly  to  net  earn- 
ings of  some  of  our  leading  industrial  concerns  engaged  in  many 
different  kinds  of  business  for  the  years  1903  and  1904,  1907  and 
1908,  and  1913  and  1914,  together  with  percentage  of  change.' 

The  total  period  between  1903  and  19 14  is  too  short  to  be  conclu- 
sive or  to  be  much  more  than  an  indication  as  to  the  fluctuation  in 
any  given  business.  Owing  to  the  fact  that  very  few  of  our  large 
industrial  concerns  reported  earnings  much  before  1903,  it  has  been 
thought  hardly  worth  while  to  go  back  of  that  date.  An  examina- 

*  For  organization  of  above  corporations  see  Poor's  Manual  of  Industrials  (1914), 
PP-  33>  102,  1008,  1041,  1296. 

2  Ibid.  (1910),  Introduction,  p.  x. 

'  For  combined  table  showing  percentage  of  change  in  net  earnings  for  the  three 
periods,  see  Appendix,  pp.  308-309. 


INDUSTRIAL  BONDS 


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254     AI^IERICAN  AND  FOREIGN  INVESTMENT  BONDS 


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256     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

tion  of  the  above  gains  or  losses  in  net  earnings  during  periods  of 
depression  shows  that  it  cannot  be  assumed  that  any  given  concern 
always  will  show  a  falling-off  in  earnings  at  such  times.  The  per- 
formance of  any  given  company  depends  much  on  the  management 
and  initiative  shown.  It  is  to  be  noted,  however,  that  the  United 
States  Steel  Corporation  in  all  three  periods  showed  a  falling-off  in 
net  earnings  of  over  thirty  per  cent;  that  the  General  Electric  Com- 
pany showed  a  substantial  decrease  in  earnings  in  all  three  periods; 
that  the  American  Woolen  Company  showed  a  loss  in  net  profits  in 
1908  of  over  sixty-two  per  cent,  and  a  change  in  19 14  from  a  net 
loss  of  $677,685  to  net  profits  of  $2,788,602;  and  that  the  American 
Locomotive  Company  showed  a  fluctuation  in  net  earnings  from  a 
gain  of  over  twelve  per  cent  in  1904  to  a  loss  of  over  sixty- two  per 
cent  in  1914.  These  figures  show  the  extremely  fluctuating  nature 
of  the  business  of  manufacturing  and  trading  concerns. 

Another  very  important  difference  between  industrial  and  other 
corporation  bonds  is  the  highly  competitive  nature,  in  most  cases, 
Competitive  of  the  busincss.  The  facts  that  no  right  of  way,  such 
business  done  by  ^^  a  stcam  railroad  requires,  and  no  franchise,  such 
such  concerns  g^g  ^i  strcct-railway,  gas,  or  electric  Hght  and  power 
company  is  likely  to  require,  are  necessary  for  the  creation  and 
operation  of  an  industrial  concern,  —  together  with  the  fact  that 
an  industrial  concern  can  operate  in  an  almost  hmitless  field,  — 
make,  as  a  rule,  the  number  of  industrial  concerns  engaged  in  any 
one  business  and  competing  with  each  other  directly  much  greater 
than  the  number  of  steam  railroads,  and,  still  more,  public-service 
corporations,  so  competing.  Under  the  regulation  of  rates  by  the 
Interstate  Commerce  Commission,  railroad  competition  is  drifting 
toward  competition  between  sections  of  the  country  rather  than 
between  individual  railroads;  and  competition  between  public- 
service  corporations  under  the  regulation  of  state  commissions 
gradually  is  passing  away.  While  industrial  concerns  are  subject 
to  a  considerable  measure  of  public  control,  the  governing  factor  in 
their  existence  is  likely  always  to  be  competition. 

Owing  to  the  above  conditions,  the  management  of  industrial 
concerns  is  a  matter  of  far  greater  relative  importance  than  the 
management  of  steam  railroads  or  of  public-service  corporations 
—  especially  from  the  point  of  view  of  the  safety  of  their  securi- 


INDUSTRIAL  BONDS  257 

ties.   Where  an  entirely  new  business  can  be  started  without  any 
great  delay  and  where  conditions  of  keen  competi-    q^^^j  manaee- 
tion  are  likely  to  prevail,  good  or  bad  management   ™e'^t  is  per- 
is pretty  nearly  the  whole  story.  ^   Valuable  and  efl&-   important 
cient  plants,  large  working  capital,  control  of  patented   safety  0°  in-^ 
articles  or  of  some  necessary  raw  material,  all  are  highly   "^"^'^"^^  ^°^^^ 
important  and  may  be  of  great  assistance  in  taking  a  corporation 
through  a  time  of  difficulty;  but  unless  the  plants  are  used  wisely, 
economically,  and  profitably  by  the  management,  they  may  have 
very  little  value  for  any  other  purpose  and  may  be  rendered  almost 
useless  by  the  competition  of  another  concern  that  has  as  good  or 
better  plant  facilities  and  more  efficient  management,  and  the  most 
impressive  assets  as  well  as  other  advantages  may  be  dissipated 
under  poor  management. 

Owing  to  the  fact  that  the  management  of  industrial  concerns 
may  change  at  almost  any  time,  the  financing  of  such  concerns 
should  be  and  usually  is  considered  in  a  different  light  qj.^^^  question 
from  that  either  of  steam  railroads  or  of  public-service   whether  com- 

,  .  1       ,  .  petitive  manu- 

corporations.    It  is  a  grave  question  whether  strictly   facturing  or 
competitive  manufacturing  or  trading  concerns  should   cams  should 
be  bonded  at  all.   In  the  minds  of  many  people,  public     ^  °^'^^^ 
financing  through  stock  alone,  either  preferred  or  common,  or 
through  one  class  of  stock  only,  is  more  legitimate  and  more  satis- 
factory than  creating  bonded  debt. 

In  the  cases  of  industrial  concerns  controUing  important  and 
valuable  patents,  —  such  as  the  General  Electric  Company,  —  or 
in  the  cases  of  concerns  controlhng  a  large  amount  of 

.  .  Ownership  of 

some  valuable  natural  resource  like  coal,  iron  ore,  valuable  pat- 

or  phosphate  rock,  —  such  as  the  United  States  Steel  vaiuabie°natoai 

Corporation  or  the  American  Agricultural  Chemical  [arge  amoun/of 

Company,  —  or  concerns  owning  a  large  amount  of  p^^  f'^^^^^  ^^y 

valuable  real  estate,  —  such  as  Swift  &  Company,  —  proper  basis 
the  creation  of  bonded  debt  may  seem  more  legiti- 
mate and  more  expedient.  ^ 

^  Professor  Dewing,  after  an  examination  of  thirty-two  industrial  reorganizations, 
says,  "No  business  ever  developed  into  a  conspicuous  success  or  a  conspicuous  failure, 
except  through  the  ability  or  lack  of  ability  of  men."  {Corporate  Promotions  and 
Reorganizations  [Cambridge,  1914],  p.  3.) 

^  In  certain  kinds  of  business,  sometimes  called  specialty  business  —  like  that  of 


2^8      A]MERIC\N  AND  FOREIGN  INVESTMENT  BONDS 

Even  in  these  cases,  however,  and  certainly  in  all  ordinary  corn- 
Amount  of  petitive  industrial  concerns,  the  amount  of  plant 
plant  and  of        asscts  Compared  with  the  amount  of  debt  should  be 

quick  assets  ^ 

compared  with     very  much  greater  than  in  the  case  either  of  steam 

debt  should  be  mi  e         i  t  •  •  t-.        i 

greater  than  in  railroads  or  of  pubuc-scrvice  corporations,    r  urther- 

ste^am  nii°road3  more,  there  should  be  in  almost  every  case  a  large 

service  ror-"  amount  of  net  quick  assets  —  that  is,  cash,  bills 

porations  receivable,  or  marketable  securities. 

Industrial  ^^  almost  cvcry  case,  moreover,  it  is  wiser  to  have 

bonds  should  ^^  industrial  bond  issue  shaped  up  either  with  a 

be  issued  in  ^        _  .        . 

serial  form  or  strong  sinking-fund  or  else  as  a  serial  issue,  so  that 
strong  sinking-  a  reasonable  proportion  of  the  debt  will  be  retired  or 
provided  for  each  year. 

The  question  that  we  have  discussed  in  previous  chapters  in  the 
cases  of  steam  railroads  and  of  public-service  corporations  —  the  re- 
Relation  of  lation  of  such  concerns  to  the  public  —  has  reached  in 
concerns  to^"  the  casc  of  industrial  concerns  an  interesting  stage  of 
the  public  development.  What  is  the  relation  of  our  great  manu- 

facturing and  trading  concerns  to  the  public?  If  such  concerns  are 
to  issue  bonds,  it  is  highly  important  to  know  their  general  status. 
Do  they  exist  legally?  Do  they  carry  on  their  business  in  conform- 
ity with  law  and  with  good  business  usage?  Are  they  subject  to 
interference  on  the  part  of  the  Government  or  to  especially  destruc- 
tive competition?  On  what  facts  and  conditions  does  their  status 
depend?  In  the  following  pages  we  will  attempt  to  outline  or  sug- 
gest possible  answers  to  these  questions. 

It  may  m^ake  this  phase  of  our  subject  clearer  if  we  outline  the 
origin  and  growth  of  the  so-called  "trust  problem."  As  stated  ear- 
Historic  forms  Her  in  this  chapter,  business  combinations  in  the 
aldod'Jnof'the  United  States  first  took  the  form  of  partnerships, 
trust  question  Then,  Under  the  authority  of  satisfactory  corporation 
laws  in  New  York,  Massachusetts,  Michigan,  and  other  States, 
business  began  to  be  organized  in  the  form  of  corporations.  Subse- 
quently there  appeared  these  forms  of  combination :  — 

(i)  The  gentlemen's  agreement. 

This  was  usually  an  informal  arrangement  to  maintain  prices 

Quaker  Oats,  Royal  Baking  Powder,  or  Baker's  Chocolate  —  a  well-established  trade- 
mark, built  up  through  advertising,  is  an  asset  of  great  value,  but  hardly  of  a  kind 
suitable  for  bonding. 


INDUSTRIAL  BONDS  259 

and  sometimes  to  regulate  production,  and  was  illustrated  in  the 
cases  of  the  United  States  Leather  Company,  the  Glucose  Sugar 
Refining  Company,  the  National  Cordage  Company,  and  the 
United  States  Shipbuilding  Company.^ 

(2)  The  pool. 

Under  this  plan  several  concerns  engaged  in  a  similar  business 
agreed  to  divide  the  territory  among  themselves,  to  regulate  the 
selling  price  of  their  commodity,  and  generally  to  establish  a  com- 
munity of  interest.  This  form  of  combination  was  illustrated  in 
the  cases  of  the  glucose,  cordage,  and  steel  business. ^  It  was  finally 
held  to  be  illegal,^  and  became  as  far  as  known  practically  non- 
existent. 

(3)  The  strict  or  true  trust. 

Here  the  several  properties  intended  to  be  combined  were  trans- 
ferred to  individuals  as  trustees,  who  issued  certificates  of  bene- 
ficial interest.  The  trustees  managed  the  business  of  the  several 
combined  properties  and  paid  dividends  on  the  certificates  issued. 
Examples  of  this  form  of  organization  were  the  old  Standard  Oil 
Trust,  the  Sugar  Trust,  the  Whiskey  Trust,  and  the  National  Cor- 
dage Association.^  This  form  of  organization  also  was  held  to  be 
illegal,^  and  practically  passed  out  of  existence.^ 

(4)  The  large  corporation  —  often  in  the  form  of  a  holding  company. 

The  prohibition  of  pooling  and  the  illegality  of  true  trusts  had 
the  effect  of  driving  practically  all  "big  business"  into  the  cor- 
porate form.'' 

This  is  the  origin  of  what  has  loosely  but  conimonly  been  called 
the  "trust  question."^ 

There  are  certain  obvious  and  legitimate  advantages  of  combi- 
Economic  nation,  or  perhaps  we  may  say  of  great  size.   Among 

coXSn  or    these  may  be  mentioned:  - 
of  great  size  (j)  Ability  to  handle  large  orders. 

(2)  Ability  to  buy  in  large  quantities  and  therefore  more  cheaply. 

*  Corporate  Promotions  and  Reorganizations,  p.  519.        *  Ihid.,  pp.  76,  114,  520. 
'  United  States  v.  Addyston  Pipe  &  Steel  Co.,  175  U.S.  211. 

*  Corporate  Promotions  and  Reorganizations,  pp.  1 16-17. 

*  People  V.  The  North  River  Sugar  Refining  Co.,  121  N.Y.  582;  State  v.  Standard 
Oil  Co.,  49  Ohio  St.  137. 

^  Report  of  Industrial  Commission,  vol.  xrx,  p.  607. 

^  Ibid.,  vol.  xm,  p.  6.  It  is  interesting  to  note  that  the  cordage  industry  passed 
through  all  four  forms  of  organization.  (See  Dewing,  Corporate  Promotions  and  Reor- 
ganizations, p.  518.) 

*  For  above  account  see  Robert  L.  Raymond  in  Harvard  Laiv  Rcviciv,  vol.  xvi.  pp. 
80-81;  Francis  Lynde  Stetson  in  Atlantic  Monthly,  vol.  ex,  pp.  31-32;  and  Dewing, 
Corporate  Promotions  and  Reorganizations,  pp.  518-21. 


26o     AlIERICAN  AND  FOREIGN  INVESTMENT  BONDS 

(3)  Ability  to  sell  in  large  quantities  and  therefore  at  a  smaller 

percentage  of  profit. 

(4)  Ability  to  utilize  waste. 

(5)  Ability  to  save  charges  of  transportation  by  shipping  from 

the  plant  nearest  in  location  to  the  consumer. 

(6)  Ability  to  specialize  labor. 

(7)  Opportunity  for  experimentation. 

These  are  what  may  be  called  the  economic  advantages  of  com- 
bination^ or  of  great  size. 
There  are  also  advantages  of  one  kind  or  another  in  the  combi- 
„    .      ,  ,         nation  of  competing  concerns  in  some  form  of  organiza- 

Savingofthe  .  ^  ,  ,  .  ■■ 

wastes  of  tion.   Among  these  may  be  mentioned :  — 

competition  /   \    o       •        •      ,i  .       r  , 

(i)  bavmg  m  the  cost  of  management  or  superin- 
tendence by  the  elimination  of  duplicate  staffs. 

(2)  Reduction  in  the  number  of  salesmen. 

(3)  Greater  control  of  output  and  prices. 

These  may  be  called  some  of  the  savings  of  the  wastes  of  com- 
petition. ^ 

Possible  dis-  Very  often  these  theoretical  advantages  are  offset 

krge^sofie^  °^      in  practice  by  factors  having  an  opposite  effect. 
operation  YoY  instance:  — 

(i)  Large  companies  in  purchasing  a  great  amount  of  raw  ma- 
terial sometimes  push  the  price  up  against  themselves. 

(2)  Large  concerns  often  are  less  able  to  avoid  over-production 
in  a  falling  market. 

(3)  Heavy  investment  in  specialized  machinery  sometimes  makes 
a  large  concern  peculiarly  susceptible  to  changes  in  trade 
conditions. 

(4)  The  combination  often  is  unwilling  to  change  its  methods 
of  production  or  distribution  in  accordance  with  improve- 
ments in  technique.' 

To  this  class  of  difficulties  may  be  added :  — 

(i)  The  unwieldy  size  of  some  combinations  has  made  almost 

impossible  the  obtaining  of  management  able  to  cope  with 

such  a  large  situation. 
(2)  There  is  likely  to  be  too  great  diffusion  of  responsibility  in 

the  management  of  very  large  units. 

1  See  Raymond  in  Harvard  Law  Revietv,  vol.  xvi,  pp.  82-83. 

2  Ibid.,  pp.  83-84.  3  See  Dewing,  pp.  558-62,  and  564-65. 


INDUSTRIAL  BONDS  261 

(3)  There  is  usually  a  lack  of  acquaintance  on  the  part  of  the 
management  with  individual  employees. 

(4)  There  is  Likely  to  be  a  lack  of  loyalty  or  single-mindedness  on 
the  part  at  least  of  some  of  the  officers. 

(5)  There  is  Ukely  to  be  a  lack  of  attention  to  the  laborious  parts 
of  the  business  by  higher  officials. 

(6)  The  methods  of  marketing  the  product  may  be  too  mechan- 
ical. 

(7)  There  may  be  prejudice  on  the  part  of  customers  against 
improved  methods  of  conducting  the  business. 

(8)  There  may  be  prejudice  on  the  part  of  the  customers  against 
"trusts." 

(9)  The  combination  is  likely  to  be  susceptible  to  poHtical  and 
legislative  attacks  and  sometimes  to  blackmail.^ 

In  actual  practice,  the  disadvantages  of  combination  or  of  large 
size  often  have  more  than  ojEfset  the  advantages. 

Such  concerns  as  the  Standard  Oil  Company,  the  American  Brass 
Company,  and  the  American  Radiator  Company  have  been  able 
to  evolve  management  which  has  given  them  in  prac-   successful  and 
tice  all  the  advantages  of  large-scale  operation;  on  the   Ta'rge-scaie"' 
other  hand,  other  concerns,  some  of  which  we  shall   operation 
discuss  later  in  this  chapter,  seem  to  have  been  handled  in  such  a 
way  as  to  develop  most  of  the  disadvantages  and  very  few  of  the 
advantages  of  large-scale  business.   It  is  interesting  if  not  wholly 
significant  that  in  a  time  of  general  depression,  such  as  the  latter 
part  of  1914  and  the  early  part  of  191 5,  the  United  States  Steel 
Corporation  showed  record  low  earnings,  whereas  the  Bethlehem 
Steel  Corporation,  under  the  personal  management  and  initiative 
of  Mr.  Schwab,  showed  the  largest  net  earnings  in  its  history. 

Neither  the  advantages  nor  the  disadvantages  of  combination 
or  of  size  should  be  confused  with  what  may  be  called   Distinction 
monopoly   control.     Monopoly   control   means   the  between  ad- 

■^      •'  .  .  ,  .  vantages  or  dis- 

power  to  control  the  situation  —  the  power  to  dictate  advantages  of 
terms  to  the  laborer  and  the  power  to  fix  the  price  of  size  and  mono- 
goods  to  the  consumer.  Briefly,  it  is  the  power  to  do  ^  ^  "^°°''^° 
as  one  pleases. ^ 

*  See  Dewing,  pp.  558-62,  and  564-65. 

*  See  Robert  L.  Raymond  in  Harvard  Law  Review,  vol.  xvi,  pp.  82-84. 


262      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

Desire  (i)  to  secure  the  advantages  of  size,  (2)  to  save  the  wastes 
of  competition,  and  (3)  to  secure  monopoly  control,  have  been  the 
Motives  for        three  leading  reasons  for  the  combination  of  industrial 

combination  concems.^ 

Advantages  of  If  there  is  to  be  combination,  there  are  many 
form  oTorgan-  advantages  in  combining  in  the  form  of  a  corporation, 
ization  jj^  j^  Corporation :  — 

(i)  Many  persons  are  able  to  act  as  a  single  legal  entity. 

(2)  There  is  continuity  of  existence. 

(3)  The  Uability  of  stockholders  is  limited  in  amount. 

(4)  There  is  ability  to  raise  a  large  capital  because  of  the  lim- 
ited liability  and  the  convenience  of  transferring  evidence 
of  ownership  or  stock  certificates. 

(5)  Actual  management  may  be  entrusted  to  a  small  body  of  men 
usually  called  the  directors. 

The  corporation  is  the  only  known  form  of  organization  in  which 
all  these  advantages  exist  together.  ^ 

The  combining  in  the  form  of  a  corporation  immediately  places 
the  corporation  under  possible  public  control;  for  the  corporation 
The  corpora-  derives  its  very  existence  from  the  public.^  If  a  given 
to°pubHc^^^*^*^  corporation  is  engaged  in  interstate  commerce,  —  and 
control  most  large  corporations  are,  —  it  becomes  subject  not 

only  to  state,  but  to  federal  control. 

Except  in  a  very  limited  way,  this  control  was  not  exercised  in 

any  form  by  the  Federal  Government  until  1890.  The  development 

of  great  combinations  of  capital  in  the  form  of  cor- 

Enactment  of  .  •      •  i  •  i  i 

the  Sherman       poratious,  —  comcidcnt  With  an  almost  phenomenal 

Anti-Trust  Law  .i      •  i    .  •  j  •       j.v       tt    '^    j 

growth  m  population  and  resources  in  the  United 
States,  —  together  with  a  growing  fear  on  the  part  of  the  people  of 
the  economic  and  social  evils  possible  under  the  circumstances,  led 
to  the  enactment  in  1890  of  the  so-called  Sherman  Anti-Trust  Law.^ 
The  provisions  of  this  law  later  were  made  applicable  specifically 

^  Another  reason  often  has  been  the  desire  of  promoters  or  bankers  to  make  a  profit 
out  of  the  promotion  of  the  combination  or  the  dealing  in  its  securities. 

^  See  Harvard  Law  Review,  vol.  xvi,  p.  92.  Some  people  would  except  voluntary 
associations  from  this  statement. 

'  See  Williston  on  "History  of  Law  of  Business  Corporations  before  1800,"  Harvard 
Law  Review,  vol.  11,  p.  112. 

*  Act  July  2,  1890  (26  Stat.  L.  209). 


INDUSTRIAL  BONDS  263 

to  imports  from  any  foreign  country/  as  well  as  to  foreign  and 
interstate  commerce  as  a  whole. 

The  important  provisions  of  the  Sherman  Anti-   Leading  pro- 
Trust  Law  are  as  follows:  —  ^'>'ons  of  the 

bherman  Anti- 

Sedion  i.  Every  contract,  combination  in  the  form  of      ™^ 
trust  or  otherwise,  or  conspiracy  in  restraint  of  trade  or  commerce 
among  the  several  States  or  with  foreign  nations  is  hereby  declared 
to  be  illegal.    (Such  acts  are  made  criminal  and  penalties  are  pro- 
vided.) 

Section  2.  Every  person  who  shall  monopolize  or  attempt  to  monopo- 
lize, or  combine  or  conspire  with  any  other  person  or  persons  to  monop- 
olize any  part  of  the  trade  or  commerce  among  the  several  States  or 
with  foreign  nations  shall  be  deemed  guilty  of  a  misdemeanor.  .  .  .  (Pen- 
alties are  provided.) 

These  provisions  remain  in  force  to-day.  Until  recently,  this 
was  the  statute  under  which  all  federal  suits  against  alleged  illegal 
combinations  in  restraint  of  trade  were  brought. 

How  has  this  law  worked  in  practice?  To  what  extent  has  it  been 
enforced?  How  has  it  been  interpreted  by  the  United  States  Su- 
preme Court?  Are  its  provisions  as  now  interpreted 

.  •     -.    rr^i  ,  .  .„     How  has  the 

Wise  or  unwise?    1  he  answers  to  these  questions  will   Sherman  Law 
lead  us  far  in  estimating  the  present  status  of  great 
industrial  corporations  in  their  relation  to  the  public. 

The  Sherman  Anti-Trust  Law  has  been  enforced  intermittently, 
spasmodically,  and  at  times  almost  arbitrarily.  Under  President 
McKinley,  it  was  hardly  enforced  at  all;  under  Presi-  Enforcement 
dent  Roosevelt,  it  was  enforced,  it  has  been  charged,  °^  '^^^  ^^^ 
against  his  enemies  and  not  enforced  against  his  friends;  under 
President  Taft,  it  was  enforced  apparently  impartially,  but  under 
a  conception  of  the  Attorney- General  as  to  what  constituted  a 
dangerous  share  of  the  total  business  in  any  given  industry.  All 
efforts  at  enforcement  have  been  confined  to  a  comparatively  few 
cases,  owing  to  the  physical  impossibility  of  instituting  court  pro- 
ceedings —  the  only  method  of  enforcement  provided  —  against 
any  large  number  of  offenders  covered  by  the  act.^ 

*  Act  August  27,  1894  (28  Stat.  L.  570),  as  amended  by  Act  February  12,  1913 
(37  Stat.  L.  667). 

*  See  J.  H.  Benton,  "The  Sherman  or  Anti-Trust  Act,"  reprinted  from  Fc/e  Law 


264      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

The  early  interpretation  of  the  Sherman  Anti-Trust  Law  by- 
Early  interpre-  the  United  States  Supreme  Court  established  these 
lawTyl?'       principles: - 

Supreme  Court        ^^^  j^^^  combination  which  directly  restrains  inter- 
state trade  is  illegal. 
(.2)  A  holding  company  is  a  combination. 

(3  )  Restraint  of  trade  means  any  restraint  and  not  merely  an  unrea- 
sonable restraint. 

(4)  Direct  restraint  of  trade  means  restraint  in  some  degree  sub- 
stantial. 

(5)  Trade  is  restrained  by  the  ending  or  limiting  of  competition  among 
the  members  of  the  combination  as  well  as  when  the  business  of 
others  is  injured. 

(6)  The  mere  power  to  restrain  trade  is  sufficient  to  bring  a  combina- 
tion within  the  act. 

(7)  This  power  need  not  be  broad  enough  to  cover  the  whole  country 
or  even  a  large  part.^ 

Until  recently,  this  drastic  and  sweeping  interpretation  of  the 
Sherman  Anti-Trust  Act  was  the  law. 

In  its  most  important  phase  the  law,  as  thus  laid  down  by  the 
United  States  Supreme  Court,  was  a  departure,  not  only  from  the 
This  interpre-  apparent  intention  of  Congress  when  passing  the  Sher- 
paSe^from  ^^^  Act,^  but  also  from  a  well-estabUshed  rule  of  the 
common  law  common  law.  This  rule  was  that  "restraint  of  trade 
or  commerce"  meant  a  restraint  that  was  unreasonable.^  In  two  of 
the  cases  in  which  a  majority  of  the  court  held  the  Sherman  Act 
applicable  to  any  direct  restraints  of  trade,  opinions  were  delivered 

Journal,  March,  1909,  pp.  7, 13, 14.  This  article  gives  a  complete  list  of  suits  in  equity 
brought  by  the  Attorney- General  under  the  Sherman  Act  up  to  January  i,  1909. 

^  Robert  L.  Raymond  in  Harvard  Law  Review,  vol.  xxiii,  p.  373.  See  United  States 
V.  E.  C.  Knight  Company,  156  U.S.  i;  United  States  v.  Trans-Missouri  Freight  Asso- 
ciation, 166  U.S.  290;  United  States  v.  Joint  TrafEc  Association,  171  U.S.  505;  Hop- 
kins V.  United  States,  171  U.S.  578;  Anderson  v.  United  States,  171  U.S.  604; 
Addyston  Pipe  &  Steel  Co.  v.  United  States,  175  U.S.  21;  Montague  v.  Lowry,  193 
U.S.  38;  Northern  Securities  Co.  v.  United  States,  193  U.S.  197;  Swift  v.  United 
States,  196  U.S.  375;  Harriman  v.  Northern  Securities  Co.,  197  U.S.  244;  Board  of 
Trade  of  Chicago  v.  Christie  Grain  &  Stock  Co.,  198  U.S.  236;  Loewe  v.  Lawlor,  208 
U.S.  274;  Continental  Wall  Paper  Co.  v.  Voight  &  Sons,  212  U.S.  227;  American 
Banana  Co.  v.  United  Fruit  Co.,  213  U.S.  347.  The  Sherman  Law  never  has  been 
interpreted  by  the  Supreme  Court  as  regards  foreign  commerce.  {Public  Service 
Regulation  and  Federal  Trade  Reporter,  January  i,  1915,  p.  12.) 

''  See  Congressional  Record,  vol.  xxi,  part  4,  pp.  3146,  3148. 

'  See  William  F.  Dana  in  Harvard  Law  Review,  vol.  xvi,  pp.  179,  180. 


INDUSTRIAL  BONDS  265 

insisting  on  the  old  common-law  meaning,  that  is,  unreasonable 
restraints.'' 

The  above  interpretation  could  not  last.  It  made  illegal  every 
combination  directly  restraining  interstate  commerce,  whether 
such  restraint  was  reasonable  or  unreasonable.    It   ^, .  . 

•      11  1        •  •        1       TT    •      1     •'■'^^^  interpre- 

made  practically  every  busmess  man  m  the  Umted   tation  could 
States  Hable  to  criminal  prosecution.   If  strictly  and 
imiversaUy  enforced,  which  it  was  not  and  could  not  be,  it  would 
have  brought  the  business  of  the  United  States  as  a  whole  to  a 
standstill.  2 
In  later  decisions  of  the  Supreme  Court,  the  law  in   ^^     .  ^ 

'^  '  ,      New  interpre- 

substance  if  not  in  words  was  changed.   These  deci-   tation  in  the 
sions  were  in  the  famous  Standard  Oil  and  American   and  American 
Tobacco  cases.3  In  these  cases,  the  court  held:  —        Tobacco  cases 

(i)  That  the  Anti-Trust  Act  prohibited  unreasonable  or  undue  re- 
straint of  interstate  trade  or  attempts  to  monopolize  the  same  in 
any  and  every  form. 

(2)  That  trade  is  unduly  restrained  (a)  by  agreements  which  lessen 
competition  among  those  agreeing  to  an  extent  which  reasonably 
may  be  thought  to  injure  the  competing  or  consuming  pubUc;  {h) 
by  acts,  combinations,  or  mere  conditions  of  existence  which  rep- 
resent a  purpose  to  acquire  monopoly  control. 

(3)  That  the  Standard  Oil  Company  of  New  Jersey  and  the  American 
Tobacco  Company,  as  shown  conclusively  by  the  purposes  and 
results  of  their  conduct,  were  engaged  both  in  unreasonable  or 
undue  restraints  of  interstate  trade  and  also  in  attempts  to  monop- 
olize the  same;  that  therefore  they  were  illegal  under  both  the  first 
and  second  sections  of  the  Sherman  Act.* 

In  these  decisions  the  Supreme  Court  practically  reestablished 
the  common-law  rule  in  regard  to  restraint  of  trade. 
In  reaching  this  conclusion,  the  court  took  as  the  principal  test 

^  See  White,  J.,  in  United  States  v.  Trans-Missouri  Freight  Association,  166  U.S. 
290;  Brewer,  J.,  in  Northern  Securities  Co.  v.  United  States,  193  U.S.  197. 

^  See  J.  H.  Benton,  from  Yale  Law  Journal,  March,  1909,  p.  15.  According  to 
Charles  R.  Van  Hise,  the  early  interpretation  of  the  Sherman  Act  took  us  back  to  the 
principles  which  prevailed  in  England  from  the  Middle  Ages  to  1844.  {Public  Service 
Regulation,  February  15,  1915,  p.  99.) 

*  Standard  Oil  Company  of  New  Jersey  v.  United  States,  221  U.S.  i  (191 1);  United 
States  V.  American  Tobacco  Company,  221  U.S.  106  (1911). 

*  See  Robert  L.  Raymond  in  Harvard  Law  Review,  vol.  xxv,  pp.  35-36,  and  in 
Journal  of  Political  Economy,  vol.  xx,  p.  316. 


266     MIERICAN  AND  FOREIGN  INVESTMENT  BONDS 

of  illegality  the  injury  of  the  competing  or  consuming  public.   It 
,    ,         held  that  interference  with  the  right  of  others  to  trade 

Grounds  of  ...,,, 

decisions  in  was  an  undue  restramt;  it  considered  that  oppression 
andAmerican  of  the  public  and  the  use  of  unfair  methods  of  com- 
Tobacco  cases  petition  constituted  attempts  at  monopoly.  In  the 
American  Tobacco  case,  the  court  distinctly  stated  that  it  did  not 
base  its  decision  (i)  on  mere  size,  (2)  on  the  mere  fact  of  combina- 
tion, (3)  on  the  mere  extent  of  control  over  the  trade.  In  both  cases 
the  court  took  its  stand  on  the  broad  ground:  " Is  this  a  case  where 
the  general  public  is  injured?"  The  subject  of  attack  was  not 
the  principle  of  combination,  but  monopoly  control  and  unfair 
methods.^ 

The  evidence  in  the  Standard  Oil  case  showed  that  the  company 
had  received  from  railroads  rebates  and  discriminations;  that  it 
Evidence  on  had  made  contracts  in  restraint  of  trade;  that  it  had 
decision^^  indulged  in  local  price-cutting,  in  spying  on  competi- 

were  based  tors,  and  in  the  operation  of  bogus  independent  com- 
panies.2  The  evidence  in  the  American  Tobacco  case  showed  that 
the  company  paid  for  competing  concerns  prices  entirely  out  of 
proportion  to  actual  valuations;  that  in  many  cases  it  abandoned 
and  dismantled  plants  purchased;  that  in  practically  every  case  of 
purchase  of  a  competing  concern  it  forced  an  agreement  from  that 
concern  not  to  engage  in  the  tobacco  business  for  a  long  term  of 
years;  that  it  lowered  at  times  the  price  of  its  product  below  cost 
to  kill  off  competition;  and  that  generally  it  engaged  in  competition 
of  a  sort  which  resulted  in  driving  others  out  of  business  or  com- 
pelling them  to  enter  the  combination.  The  methods  by  which 
the  combination  was  brought  about  and  control  maintained  were 
secretive  and  misleading,  showing  a  conscious  wrongdoing  with 
intent  to  obtain  mastery.  ^ 

standard  Oil  '^^^  Standard  Oil  and  American  Tobacco  decisions 

and  American      brought  the  interpretation  of  the  Sherman  Anti-Trust 

Tobacco  cases  "  .      ^  .  .  ,        .        ^m 

brought  inter-  Act  to  a  practicable  and  intelligent  basis.  They  were 
Sherman  Act  to  in  cvcry  scnsc  of  the  word  "reasonable"  decisions, 
a  workable  basis  r^^^^  permitted  combinations  formed  to  secure  the 

^  Harvard  Law  Review,  vol.  xxv,  pp.  35-53.  For  the  announcement  of  similar 
principles,  see  the  recent  decision  of  the  English  Lord  Chancellor  in  the  Salt  Monopoly 
case.   {Public  Service  Regulation,  February  15,  1915,  p.  102.) 

2  Harvard  Law  Review,  vol.  xxv,  p.  35.  '  Ibid.,  pp.  46,  49. 


INDUSTRIAL  BONDS  267 

economic  benefits  of  size  or  to  save  the  wastes  of  competition,  but 
they  refused  to  permit  combinations  formed  to  secure  monopoly 
control  —  that  is,  formed  to  do  as  the  combinations  pleased  with 
production,  wages,  and  prices.  They  refused  to  permit  such  com- 
binations by  refusing  to  permit  unfair  methods. 

Combinations  formed  and  capitaUzed  on  the  basis  of  monopoly 
control  cannot  endure  if  competition  is  given  a  fair  chance.  They 
are  inherently  unsound.  Such  combinations  owe  their   ,,  . 

1  1     .         .  1         1  •!•  "  given  a  fair 

success,  perhaps  even  their  existence,  to  the  ability  to   chance  compe- 
interf ere  with  the  rights  of  outsiders  —  in  other  words,    feat  monopoly 
to  the  use  of  unfair  methods  of  competition.  To  pay   ^°^^^'^ 
dividends  on  a  capitalization  representing  monopoly  control,  a 
combination  must  lower  wages  or  raise  prices.   The  truth  of  this 
will  be  shown  when  we  take  up  later  in  this  chapter  certain  indus- 
trial failures.  These  failures,  where  they  were  not  due  to  inefficient 
management,  were  due  to  inabihty  to  maintain  monopoly  control 
in  the  face  of  actual  or  potential  competition.  To  make  potential 
competition  effective  is  the  basis  of  a  true  solution  of  the  trust 
problem.^ 

Potential  competition  may  be  made  effective:  (i)  By  giving  alien 
capital  a  chance  to  know  all  the  facts  —  that  is,  by  pubHcity;  (2) 
by  insisting  that  combinations  shall  fight  competition 
by  fair  methods  only;  (3)  by  preventing  the  abuse  of   undel-' which 
monopoly  during  the  period  necessary  for  potential   competition 
competition  to   become   actual   competition  —  that   ^j^y  be  made 

cnectivc 

is,  by  some  form  of  government  inspection  or  super- 
vision. ^   These  conditions  will  enable  outsiders  to  compete. 

This  solution  of  the  problem  has  been  attempted  recently  in 
the  passage  by  Congress  of  two  laws:  ^  Enactment  of 

(i)  "An  Act  to  supplement  existing  laws  against  un-    Federaf Trade 
lawful  restraints   and  monopohes  and  for  other   Commission 
purposes";  approved  October  15,  1914,  and  com- 
monly known  as  the  ''  Clayton  Anti-Trust  Act." 

(2)  "An  Act  to  create  a  Federal  Trade  Commission,  to  define  its 

1  Harvard  Law  Review,  vol.  xxv,  p.  56;  Ibid.,  vol.  xvi,  pp.  88-93;  and  Dewing, 
Corporate  Promotions  and  Reorganizations,  p.  558. 

^  Harvard  Law  Review,  vol.  xvi,  pp.  88-93. 

2  Acts  of  63d  Congress,  1913-14,  Stats.  L.,  part  i,  p.  730,  and  Acts  of  63d  Con- 
gress, igi3-i4,  Stats.  L.,  part  i,  p.  717. 


268      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

powers  and  duties,  and  for  other  purposes";  approved  September 

26, 1914. 
These  two  laws  were  considered  in  connection  with  each  other. 
Leading  pro-  The   leading  provisions   applicable   to   industrial 

c£?on°Antl      conccms   of   the   Clayton   Anti-Trust   Act   are   as 

Trust  Law  folloWS:  — 

Section  2.  That  it  shall  be  unlawful  for  any  person  engaged  in 
commerce/  in  the  course  of  such  commerce,  either  directly  or  in- 
directly to  discriminate  in  price  between  different  purchasers  of  com- 
modities, which  commodities  are  sold  for  use,  consumption,  or  resale 
within  the  United  States  or  any  Territory  thereof  or  the  District  of 
Columbia  or  any  insular  possession  or  other  place  under  the  jurisdic- 
tion of  the  United  States,  where  the  effect  of  such  discrimination  may 
be  to  substantially  lessen  competition  or  tend  to  create  a  monopoly  in 
any  Une  of  commerce:  Provided,  That  nothing  herein  contained  shall 
prevent  discrimination  in  prices  between  purchasers  of  commodities  on 
account  of  differences  in  the  grade,  quality,  or  quantity  of  the  commod- 
ity sold,  or  that  makes  only  due  allowance  for  difference  in  the  cost  of 
selling  or  transportation,  or  discrimination  in  price  in  the  same  or  differ- 
ent communities  made  in  good  faith  to  meet  competition:  And  provided 
further,  That  nothing  herein  contained  shall  prevent  persons  engaged  in 
selling  goods,  wares,  or  merchandise  in  commerce  from  selecting  their 
own  customers  in  bona  fide  transactions  and  not  in  restraint  of  trade. 

Section  j.  That  it  shall  be  unlawful  for  any  person  engaged  in  com- 
merce, in  the  course  of  such  commerce,  to  lease  or  make  a  sale  or  contract 
for  sale  of  goods,  wares,  merchandise,  machinery,  supplies  or  other  com- 
modities, whether  patented  or  unpatented,  for  use,  consumption  or 
resale  within  the  United  States  or  any  Territory  thereof  or  the  District 
of  Columbia  or  any  insular  possession  or  other  place  under  the  jurisdic- 
tion of  the  United  States,  or  fix  a  price  charged  therefor,  or  discount 
from,  or  rebate  upon,  such  price,  on  the  condition,  agreement  or  under- 
standing that  the  lessee  or  purchaser  thereof  shall  not  use  or  deal  in  the 
goods,  wares,  merchandise,  machinery,  supplies  or  other  commodities  of 
a  competitor  or  competitors  of  the  lessor  or  seller,  where  the  effect  of 
such  lease,  sale,  or  contract  for  sale  or  such  condition,  agreement  or 
understanding  may  be  to  substantially  lessen  competition  or  tend  to 
create  a  monopoly  in  any  Une  of  commerce. 

Section  7.  That  no  corporation  engaged  in  commerce  shall  acquire, 

directly  or  indirectly,  the  whole  or  any  part  of  the  stock  or  other  share 

capital  of  another  corporation  engaged  also  in  commerce  where  the  effect 

of  such  acquisition  may  be  to  substantially  lessen  competition  between 

1  Meaning  interstate  or  foreign  commerce. 


INDUSTRIAL  BONDS  269 

the  corporation  whose  stock  is  so  acquired  and  the  corporation  making 
the  acquisition,  or  to  restrain  such  commerce  in  any  section  or  commun- 
ity, or  tend  to  create  a  monopoly  of  any  line  of  commerce. 

No  corporation  shall  acquire,  directly  or  indirectly,  the  whole  or  any 
part  of  the  stock  or  other  share  capital  of  two  or  more  corporations  en- 
gaged in  commerce  where  the  effect  of  such  acquisition,  or  the  use  of  such 
stock  by  the  voting  or  granting  of  proxies  or  otherwise,  may  be  to  sub- 
stantially lessen  competition  between  such  corporations,  or  any  of  them, 
whose  stock  or  other  share  capital  is  so  acquired,  or  to  restrain  such 
commerce  in  any  section  or  community,  or  tend  to  create  a  monopoly  of 
any  line  of  commerce.  .  .  . 

Section  8.  That  from  and  after  two  years  from  the  date  of  the  ap- 
proval of  this  Act  no  person  at  the  same  time  shall  be  a  director  in  any 
two  or  more  corporations,  any  one  of  which  has  capital,  surplus,  and 
undivided  profits  aggregating  more  than  $1,000,000,  engaged  in  whole 
or  in  part  in  commerce  ...  if  such  corporations  are  or  shall  have  been 
theretofore,  by  virtue  of  their  business  and  location  of  operation,  com- 
petitors, so  that  the  elimination  of  competition  by  agreement  between 
them  would  constitute  a  violation  of  any  of  the  provisions  of  any  of  the 
Anti-Trust  Laws.^ 

These  provisions  are  the  gist  of  the  law. 

Other  important  sections  applicable  to  industrial  concerns  are: 
one  providing  that  any  violation  of  the  penal  provisions  of  the 
Anti-Trust  Laws  by  a  corporation  shall  be  deemed   ^  ,     . 

r     1       •     T    •  1      1     T  rr-  Other  impor- 

also  a  cnme  of  the  mdividual  directors,  oincers,  or   tant  provisions 
agents  who  have  authorized  such  violation;  ^  one   mdustriaf 
providing  that  any  person,  firm,  corporation,  or  asso-   ^°'^^'^™^ 
ciation  shall  be  entitled  to  sue  for  and  have  injunctive  relief  against 
threatened  loss  or  damage  through  a  violation  of  the  Anti-Trust 
Laws; '  and  one  vesting  authority  to  enforce  sections  2, 3,  7,  and  8, 
in  so  far  as  they  are  applicable  to  industrial  concerns,  in  the  Federal 
Trade  Commission  subject  to  review  by  the  courts.^ 

The  Clayton  Anti-Trust  Act  does  not  do  away  with  any  part  of 
the  Sherman  Anti-Trust  Law  of  1890.    It  amplifies   Clayton  Act 
and  supplements  that  law.  In  the  opinion  of  ex-Presi-   suppifmentsthe 
dent  Taft,  it  does  not,  with  the  possible  exception  of  Sherman  Act 
the  so-called  tying  provision  in  the  sale  of  patented  articles,  enlarge 

^  The  Anti-Trust  Laws  in  the  meaning  of  this  act  are:  The  Sherman  Act,  portions  of 
the  Wilson  Tariff  as  amended,  and  the  Clayton  Act. 
^  Section  14.  *  Section  16.  *  Section  11. 


270     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

the  field  of  illegal  and  criminal  effort  in  respect  to  restraints  of 
interstate  commerce  or  monopolies.  In  other  words,  all  the  leading 
prohibitions  concerning  restraints  of  trade  in  the  Clayton  Act  — 
(i)  discriminations  in  price  in  sales  of  goods,  (2)  sale  of  goods  pat- 
ented or  unpatented  on  condition  that  the  purchaser  shall  not  deal 
in  or  use  the  goods  of  a  competitor,  (3)  acquisition  of  stock  by  one 
corporation  in  another,  and  (4)  acquisition  of  stock  by  one  cor- 
poration in  two  other  corporations,  when  the  effect  of  any  one  of 
these  four  acts  may  be  substantially  to  lessen  competition,  restrain 
interstate  commerce,  or  tend  to  create  a  monopoly  —  with  the 
possible  exception  above  noted,  were  covered  by  the  Sherman  Act 
as  interpreted  by  the  Supreme  Court.  The  new  law  is  therefore 
chiefly  declaratory.  ^  It  has  been  pointed  out,  however,  by  ex- 
Attorney- General  Wickersham  that  the  meaning  of  the  phrase,  "to 
substantially  lessen  competition,"  used  in  sections  2,  3,  and  7  of  the 
Clayton  Act,  remains  to  be  interpreted  by  the  courts,  just  as  the 
phrase,  "restraint  of  trade,"  in  the  Sherman  Act  has  been  inter- 
preted. ^ 

The  Clayton  Act  expressly  exempts  from  the  prohibitions  against 
price  discriminations  and  tying  contracts,  goods  not  intended  for 
Clayton  Act  "use,  consumption,  or  resale  within  the  United 
ActfrfreS  States"  — in  other  words,  exports.^  The  Sherman 
to  exports  j^(^i  ^qq^  ^q^  (Jq  SO,  but  makcs  illegal  every  contract 

or  combination  in  restraint  of  trade  "among  the  several  States  or 
with  foreign  nations."  ^  It  has  been  thought  desirable  that  groups 
of  American  manufacturers  should  be  permitted  to  join  together 
(i)  in  the  maintenance  of  joint  exhibits  of  their  products  in  foreign 
markets;  (2)  in  conducting  cooperative  sales  campaigns;  and  (3)  in 
pooling  expenses  and  dividing  profits.^  How  this  will  be  worked 
out  remains  to  be  seen. 

The  prohibitions  against  stock  ownership  in  competing  corpora- 
tions apply  only  to  ownership  by  a  corporation.  There  is  nothing 
Holding  to  prevent  the  ownership  by  one  or  more  individuals 

companies  ^f  ^^^  qj.  ^j^y  p^j.^  q£  ^-^e  stock  of  Competing  corpo- 

rations.^ 

^  Public  Service  Regulation,  November  i,  1914,  pp.  612-13. 

'^  Ibid.,  January  15,  1915,  p.  37.  ^  Sections  2  and  3.  *  Section  i. 

^  Federal  Trade  Reporter,  March  15,  1915,  p.  174. 

"  See  Rush  C.  Butler  and  Cornelius  Lynde,  The  Federal  Trade  Commission  and  the 


INDUSTRIAL  BONDS  27 1 

The  prohibition  of  interlocking  in  the  case  of  industrial  corpora- 
tions applies  not  to  officers  or  employees,  but  only  to  directors. 
Opinions  have  been  advanced  for  and  against  the  interlocking 
wisdom  of  this  prohibition.  Mr.  James  J.  Hill  thinks  directorates 
the  prohibition  ridiculous  because  it  "can  produce  nothing  but  a 
crop  of  dummy  directors."  ^  The  ideal  situation  would  be  preven- 
tion, not  of  interlocking  directors  in  all  cases,  but  of  the  abuse  of 
their  power.  A  man  should  not  act  as  buyer  and  seller  in  the  same 
transaction;  but  he  should  be  allowed  to  give  the  benefit  of  his 
broad  experience  in  certain  cases  to  more  than  one  board  of  direc- 
tors. The  only  solution  of  this  problem  is  a  sense  of  honor  on  the 
part  of  the  director,  enforced,  perhaps,  by  pubUc  opinion. 

The  personal-guilt  clause  of  the  Clayton  Act  ^  relates  to  the 
penal  provisions  of  the  Anti-Trust  Laws.   It  fastens  guilt  for  the 
illegal  act  of  the  corporation  on  the  individual  direc-   personai- 
tors,  officers,  or  agents  of  the  corporation.  It  proceeds   ^^"^  *^^^"^^ 
on  the  theory  that  to  stop  "joy-riding"  it  is  necessary  "to  arrest 
the  chauffeur  and  not  the  automobile."  ^ 

The  right  of  injunctive  relief  granted  by  the  Clayton  Act  to  any 
person,  firm,  corporation,  or  association,  against  threatened  loss  or 
damage  by  a  violation  of  anything  in  the  Anti-Trust  Machinery  of 
Laws,  is  a  right  hitherto  held  only  by  the  Govern-  enforcement 
ment.^  In  many  other  ways,  also,  the  enforcement  of  the  Anti- 
Trust  Laws  is  made  more  efficient.  The  benefit  of  a  decree  in  a 
government  suit  accrues  to  private  litigants,  and  the  time  con- 
sumed in  the  government  suit  is  added  to  the  regular  period  of 
three  years  in  determining  the  time  in  which  a  suit  may  be  brought 
for  the  recovery  of  damages.  As  hi  the  Sherman  Law,  any  individ- 
ual, corporation,  or  association  injured  in  his  business  or  property  by 
reason  of  anything  forbidden  in  the  Anti-Trust  Laws  may  sue  for 

Regulation  of  Business  under  the  Federal  Trade  Commissio7i  and  Clayton  Laws  (Chicago, 
1915),  pp.  11-13.  In  the  opinion  of  Francis  Lynde  Stetson,  holding  companies  should 
be  permitted,  but  minority  stockholders  should  be  protected.  {Atlantic  Monthly, 
vol.  ex,  p.  40.) 

^  Federal  Trade  Reporter,  March  i,  1915,  p.  139. 

^  Section  14. 

'  Statement  of  President  Wilson  as  quoted  in  the  Boston  Evening  Transcript, 
January  14,  1914. 

^  See  State  of  Minnesota  v.  Northern  Securities  Company  et  al.,  194  U.S.  48,  and 
National  Fire-Proofing  Co.  v.  Mason  Builders'  Association,  169  Fed.  Rep.  259. 


272      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

and  recover  threefold  damages  and  costs.  ^  The  (government,  as 
under  the  Sherman  Law,  may  proceed  in  equity  to  prevent  and 
restrain  violations  of  the  Anti-Trust  Laws.^ 

In  a  general  way,  the  Clayton  Act  is  part  of  the  legislation  in- 
tended to  eliminate  the  so-called  "twilight  zone"  of  legality  and 
Summary  of  the  illegality.  Some  people  think  that  in  so  far  as  it  pro- 
ciayton  Act  hibits  Certain  definite  practices  it  weakens  the  Sher- 
man Law.'  The  practices  prohibited,  however,  have  been  for 
many  years  familiar  to  business  men  and  have  come  up  again  and 
again  in  the  courts.  It  is  to  be  noted  that  no  practice  is  prohibited 
in  sections  2,3,  and  7  of  the  Clayton  Act,  unless  the  practice  shall 
have  the  effect  of  substantially  lessening  competition,  restraining 
interstate  or  foreign  commerce,  or  tending  to  create  a  monopoly. 
In  the  last  resort,  the  law  in  its  terms  gives  to  the  Circuit  Court  of 
Appeals  and  the  Supreme  Court  the  discretion  which  the  Supreme 
Court  took  for  itself  in  interpreting  the  Sherman  Act. 

Passed  at  practically  the  same  time  as  the  Clayton  Act,  and 

considered  in  connection  with  it,  is  the  Federal  Trade  Commission 

Law.    This  law  creates  a  commission  composed  of 

Federa.1  Trade 

Commission        fivc  men  appointed  by  the  President  of  the  United 
States  by  and  with  the  advice  and  consent  of  the 
Senate.  Not  more  than  three  of  the  commissioners  shall  be  mem- 
bers of  the  same  political  party.   The  term  of  office  of  each  com- 
missioner ultimately  shall  be  seven  years;  but  provision  is  made 
for  the  term  of  one  commissioner  to  mature  each  year.  Each  com- 
missioner shall  receive  a  salary  of  $10,000  a  year.  The  Commission 
shall  have  authority  to  employ  and  fix  the  compensation  of  such 
attorneys,  special  experts,  examiners,  clerks,  and  other  employees 
as  it  may  from  time  to  time  find  necessary  for  the  proper  perform- 
ance of  its  duties  and  as  may  be  appropriated  for  by  Congress. 
The  Commission  shall  succeed  the  Bureau  of  Corporations.* 
The  Commission  is  empowered  and  directed  to  prevent  persons, 
partnerships,  or  corporations,  except  banks  and  com- 

Prevention  of  .  ^  .  r   •  ^  i       i        j- 

unfair  methods  mou  camers,  from  usmg  unfair  methods  of  competi- 
of  competition  ^.^^  .^  interstate  or  foreign  commerce.  The  law  says: 
"That  unfair  methods  of  competition  in  commerce  are  hereby 

1  Section  4.  ^  Section  5. 

3  See  Annalist  (New  York),  April  20,  1914,  pp.  488-89.        *  Sections  i,  2,  and  3. 


INDUSTRIAL  BONDS  273 

declared  unlawful."  ^  Whenever  the  Commission  shall  have  reason 
to  believe  that  any  person,  partnership,  or  corporation  has  been 
or  is  using  any  unfair  method  of  competition  in  interstate  or  foreign 
commerce,  and  if  it  shall  appear  to  the  Commission  that  a  proceed- 
ing by  it  in  respect  thereof  would  be  to  the  interest  of  the  public, 
it  shall  issue  and  serve  upon  such  person,  partnership,  or  corpora- 
tion a  complaint  stating  its  charges  in  that  respect,  and  containing 
a  notice  of  a  hearing  upon  a  day  and  at  a  place  therein  fixed  at  least 
thirty  days  after  the  service  of  said  complaint.  Any  person,  part- 
nership, or  corporation  may  make  application  and,  upon  good  cause 
shown,  may  be  allowed  by  the  Commission  to  intervene  and  appear 
in  said  proceeding  by  counsel  or  in  person.  If,  upon  such  hearing, 
the  Commission  shall  be  of  the  opinion  that  the  method  of  compe- 
tition in  question  is  prohibited  by  this  act,  it  shall  make  a  report  in 
writing  in  which  it  shall  state  its  findings  as  to  the  facts,  and  shall 
issue  and  cause  to  be  served  on  such  person,  partnership,  or  cor- 
poration an  order  requiring  him  or  it  to  cease  and  desist  from  using 
such  methods  of  competition.  Until  a  transcript  of  the  record  in 
such  hearing  shall  have  been  filed  in  a  United  States  Circuit  Court 
of  Appeals,  the  Commission  may  at  any  time  modify  or  set  aside, 
in  whole  or  in  part,  any  report  or  any  order  made  or  issued  by  it 
under  this  section.  2  The  Commission  may  apply  to  the  United 
States  Circuit  Court  of  Appeals  for  the  enforcement  of  its  order, 
and  any  party  ordered  by  the  Commission  to  cease  from  unfair 
methods  of  competition  may  obtain  a  review  of  such  order  in  the 
same  court.  The  findings  of  the  Commission  as  to  the  facts,  if 
supported  by  testimony,  shall  be  conclusive.  The  court  may  order 
additional  evidence  taken  before  the  Commission.  The  court  shall 
have  power  to  make  and  enter  a  decree  affirming,  modifying,  or 
setting  aside  the  order  of  the  Commission.  The  jurisdiction  of  the 
Circuit  Court  of  Appeals  in  this  respect  shall  be  exclusive  and  the 
judgment  and  decree  of  this  court  shall  be  final  —  except  that  the 
same  shall  be  subject  to  review  by  the  Supreme'  Court  upon  certiorari. 
The  Commission  also  shall  have  authority:  — 

(i)  To  enforce,  in  so  far  as  they  are  applicable  to  in-  Other  powers 
dustrial  concerns,  sections  2,  3,  7,  and  8  of  the  of  the  Trade 
Clayton  Law.  Commission 

I  Section  5.  *  Section  5. 


274      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

(2)  To  investigate  the  organization,  business,  conduct,  practices,  and 
management  of  any  corporation,  excepting  banks  and  common 
carriers,  engaged  in  interstate  or  foreign  commerce  and  its  relation 
to  other  corporations  and  to  individuals,  associations  and  part- 
nerships. 

(3)  To  require  corporations  engaged  in  interstate  or  foreign  com- 
merce, except  banks  and  common  carriers,  to  file  with  the  Com- 
mission annual  or  special  reports  or  answers  in  writing  to  specific 
questions. 

(4)  To  investigate,  on  its  own  initiative,  the  manner  in  which  any 
final  decree  against  a  corporation  to  prevent  and  restrain  any 
violation  of  the  Anti-Trust  Acts  has  been  or  is  being  carried  out.^ 

(5)  Upon  the  direction  of  the  President  or  either  House  of  Congress,  to 
investigate  and  report  the  facts  relating  to  any  alleged  violation 
of  the  Anti-Trust  Acts  by  any  corporation. 

(6)  Upon  the  application  of  the  Attorney-General,  to  investigate  and 
make  recommendations  for  the  readjustment  of  the  business  of 
any  corporation  alleged  to  be  violating  the  Anti-Trust  Acts  in 
order  that  the  corporation  may  thereafter  maintain  its  organiza- 
tion, management,  and  conduct  of  business  in  accordance  with  law. 

(7)  To  make  pubhc  from  time  to  time  such  portions  of  the  informa- 
tion obtained  by  it  hereunder,  except  trade  secrets  and  names  of 
customers,  as  it  shall  deem  expedient  in  the  pubhc  interest;  and 
to  make  annual  and  special  reports  to  the  Congress  and  to  submit 
therewith  recommendations  for  additional  legislation;  and  to 
provide  for  the  publication  of  its  reports  and  decisions  in  such 
form  and  manner  as  may  be  best  adapted  for  public  information 
and  use. 

(8)  From  time  to  time  to  classify  corporations  and  to  make  rules  and 
regulations  for  the  purpose  of  carrying  out  the  provisions  of  this 
act, 

(9)  To  investigate,  from  time  to  time,  trade  conditions  in  and  with 
foreign  countries  where  associations,  combinations,  or  practices 
of  manufacturers,  merchants,  or  traders,  or  other  conditions,  may 
afifect  the  foreign  trade  of  the  United  States,  and  to  report  to 
Congress  thereon,  with  such  recommendations  as  it  deems  ad- 
visable. ^ 

(10)  To  act  as  a  master  in  chancery  in  any  suit  in  equity  brought  by  the 
Attorney-General  as  provided  in  the  Anti-Trust  Acts.^ 

^  On  the  application  of  the  Attorney-General,  it  must  make  such  investigation. 
^  Section  6.    Some  people  think  that  this  section  gives  the  Trade  Commission 
authority  to  act  as  a  tariff  board. 
*  Section  7. 


INDUSTRIAL  BONDS  275 

(11)  To  obtain,  on  the  direction  of  the  President,  information  relative 
to  any  corporation  subject  to  this  act  from  the  several  departments 
and  bureaus  of  the  Government  and  a  detail  of  such  officials  and 
employees  as  he  may  direct.^ 

(12)  To  have  access  to,  for  the  purpose  of  examination,  and  the  right 
to  copy  any  documentary  evidence  of  any  corporation  being  inves- 
tigated or  proceeded  against;  and  to  require  the  attendance  and 
testimony  of  witnesses  and  the  production  of  all  such  docu- 
mentary evidence  relating  to  any  matter  under  investigation.^ 

Upon  the  application  of  the  Attorney-General  of  the  United 
States,  at  the  request  of  the  Commission,  the  district  courts  of  the 
United  States  shall  have  jurisdiction  to  issue  writs  of  mandamus 
commanding  any  person  or  corporation  to  comply  with  the  provi- 
sions of  this  act  or  any  order  of  the  Commission  made  in  pursuance 
thereof.^ 

These,  with  the  prohibition  of  unfair  methods  of  competition,  are 
the  leading  provisions  of  the  Federal  Trade  Commission  Act. 

The  Federal  Trade  Commission  Act,  in  addition  to  furnishing 
machinery  for  the  enforcement  of  the  Sherman  and  Clayton  Acts, 
itself  sets  up  a  new  legislative  standard — "unfair  unfair  methods 
methods  of  competition."  The  question  of  what  are  °^  competition 
unfair  methods  of  competition,  while  not  defined  in  the  law,^  is 
understood  in  a  general  way  in  business  practice.  The  framers  of 
the  law  decided  that  to  attempt  to  define  or  enumerate  unfair 
methods  of  competition  in  advance  would  be  to  leave  open  oppor- 
tunities for  evasion  and  thereby  weaken  the  law.  For  if  only  certain 
practices  are  prohibited,  the  ingenuity  of  man  will  invent  new  ones 
which  may  be  just  as  unfair.  Mr.  Stevens,  of  the  faculty  of  Politi- 
cal Science  of  Columbia  University,  has  classified  unfair  methods 
of  competition  as  follows:  Local  price-cutting;  operation  of  bogus 
"independent"  concerns;  maintenance  of  "fighting  ships"  and 
"fighting  brands";  lease,  sale,  purchase,  or  use  of  certain  articles 
as  a  condition  of  the  lease,  sale,  purchase,  or  use  of  other  required 
articles;  exclusive  sales  and  purchase  arrangements;  rebates  and 
preferential  contracts;  acquisition  of  exclusive  or  dominant  control 

^  Section  8.  2  Section  9.  '  Ibid. 

*  "Unfair  competition"  has  a  definite  meaning  in  law  —  the  passing-off  of  one's 
goods  as  those  of  another.  Rathbone,  Sard  &  Co.  v.  Champion  Steel  Range  Co.,  189 
Fed.  Rep.  26,  31;  37  L.R.A.  (N.S.)  258;  W.  R.  Lynn  Shoe  Co.  v.  Auburn-Lynn  Shoe 
Co.,  100  Me.  461;  62  Atl.  499,  505;  4  L.R.A.  (N.S.)  960. 


276     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

of  machinery  or  goods  used  in  the  manufacturing  process;  manipu- 
lation, blacklists,  boycotts,  whitelists;  espionage  and  use  of  detec- 
tives, coercion,  threats,  and  intimidation.^  Such  methods  as  the 
above,  Congress  evidently  intended  to  prevent  in  declaring  unfair 
methods  of  competition  unlawful.  In  general,  it  intended  appar- 
ently to  prevent  those  methods  regarded  in  good  business  usage  as 
unfair  and  particularly  those  methods  likely  to  lead  to  monopoly 
—  or,  to  make  a  still  broader  generalization,  to  prevent  those 
methods  of  competition  harmful  to  the  public. ^  The  meaning  of 
the  phrase,  however,  will  have  to  be  interpreted  in  specific  cases  by 
the  Commission  and  the  courts.' 

The  new  Federal  Trade  Commission  has  been  compared  by  ex- 
President  Taft  and  others  with  the  Interstate  Commerce  Commis- 
sion. There  are  many  points  of  resemblance.  As  the 
FederdTrade  Interstate  Commerce  Law  declares  undue  discrimina- 
withTnter°s"ate  ^^^^  ^^^  Unreasonable  rates  unlawful,  so  the  Trade 
Commerce  Commissiou  Law  declares  unfair  methods  of  competi- 

Commission  .  .     , 

tion  unlawful.  As  the  former  creates  a  commission  to 
determine  what  rates  are  unduly  discriminating  and  unreasonable, 
so  the  latter  creates  one  to  determine  what  are  unfair  methods  of 
competition.  Equally  inquisitorial  powers  are  conferred  on  the  two 
commissions,  and  similar  processes  and  hearings  are  provided  in 
case  of  alleged  violation  of  the  law  on  the  complaint  of  any  one  or 
on  the  Commission's  own  initiative.  The  Interstate  Commerce 
Commission,  however,  has  a  wider  discretion,  free  from  review 
by  the  courts,  than  has  the  Trade  Commission.  The  Commerce 
Commission  not  only  finds  the  facts,  but  exercises  in  detail  the 
legislative  function  of  Congress  in  regulating  rates.  All  that  the 
courts  do  in  review  of  action  by  the  Commerce  Commission  is  to 
see  that  it  is  within  the  scope  and  limitations  of  the  general  delega- 

*  Annalist  (New  York),  October  26,  1914,  p.  340. 

2  President  Taft  considers  unfair  methods  of  competition  to  include  only  those 
methods  and  practices  the  effect  and  intent  of  which  will  bring  them  within  the  scope 
and  condemnation  of  the  first  and  second  sections  of  the  Sherman  Act.  {Public  Service 
Regulation,  November  i,  1914,  p.  612.) 

^  According  to  the  terms  of  the  law,  unfair  methods  of  competition  are  forbidden 
to  all  persons,  partnerships,  and  corporations,  except  banks  and  common  carriers, 
engaged  in  interstate  or  foreign  commerce  (see  Section  5).  For  a  discussion  of  the 
treatment  of  unfair  methods  of  competition  in  England,  France,  Germany,  and  other 
countries  see  H.  D.  Nims  in  the  Outlook,  February  7,  1914,  p.  310. 


INDUSTRIAL  BONDS  277 

tion  of  power  and  that  it  does  not  deprive  the  carrier  of  its  property 
without  due  process  of  law  —  in  other  words,  that  it  does  not  con- 
fiscate. The  function  of  the  Trade  Commission  also  is  to  find  the 
facts,  but  the  final  decision  as  to  what  are  fair  or  unfair  methods 
of  competition  will  rest  with  the  courts.^ 

Ex-President  Taf t  also  has  compared  the  functions  of  the  Trade 
Commission  in  preventing  unfair  methods  of  competition  with  the 
action  of  a  master  in  chancery.   Like  a  master,  the 
Trade  Commission  finds  the  facts;  but  unlike  a  mas-   certain  func- 
ter,  the  decision  of  the  Trade  Commission  as  to  the  Trade°Commis- 
facts,  if  supported  by  legal  evidence,  is  final,  whereas   ac°don  of  a*^^ 
the  decision  of  a  master  in  chancery  as  to  the  facts  can   Master  in 

.  Chancery 

be  reversed,  if  it  is  contrary  to  the  "weight  of  evi- 
dence." 2 

In  general,  the  new  Federal  Trade  Commission  has  been  created 
to  carry  on  the  work  of  the  Bureau  of  Corporations  in  investiga- 
tions and  also  to  furnish  a  convenient  machinery  for  General  powers 
enforcing  the  Sherman  and  Clayton  Anti-Trust  Laws  oUhe^xrade^ 
and  the  prohibition  in  the  Trade  Commission  Act  Commission 
against  unfair  methods  of  competition.  It  is  a  body  evidently 
intended  to  use  discretion.  Its  powers  are  of  three  sorts:  (i)  Inquisi- 
torial; (2)  administrative;  (3)  quasi-judicial.  It  can  investigate, 
except  as  to  financial  condition,  all  corporations  engaged  in  inter- 
state or  foreign  commerce  and  the  relation  of  such  corporations  to 
private  individuals,  firms,  and  associations.  It  can  classify  corpo- 
rations and  ask  for  information  or  reports  from  certain  classes  and 
not  ask  for  such  information  or  reports  from  other  classes.  In  other 
words,  it  can  reduce  its  investigations  to  a  workable  and  discre- 
tionary basis.  In  exercising  its  administrative  functions,  it  must 
force  compliance  with  the  terms  of  the  Clayton  Act  and  probably 
of  the  Sherman  Act.  In  the  matter,  however,  of  fiHng  a  complaint 
in  connection  with  the  use  of  unfair  methods  of  competition  ac- 
cording to  the  Trade  Commission  Act,  the  Commission  is  left  the 
discretion  of  bringing  an  action  only  in  cases  where  it  shall  appear 
to  the  Commission  that  such  action  will  be  in  the  interest  of  the 
public.  This  is,  of  course,  a  very  broad  discretion.  The  quasi- 
judicial  functions  of  the  Commission  enable  it  to  act  in  corrective 
^  Public  Service  Regulation,  November  i,  1914,  p.  613.  *  Ibid. 


278      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

processes  in  aid  of  the  courts,  in  establishing  unfair  methods  of 
competition,  in  providing  for  the  readjustment  and  reorganization 
of  corporations  under  decrees  of  the  courts  and  in  entering  consent 
decrees  in  connection  with  the  Department  of  Justice. 

The  Trade  Commission  and  the  Department  of  Justice  undoubt- 
edly will  act  in  cooperation  in  enforcing  the  Anti-Trust  Laws. 
Relation  be-  Either  the  Commission  or  the  Attorney-General's 
Federal  Trad  o^ce  Can  act  independently,  of  course,  in  a  large  field. 
Commission  It  has  been  suggested  by  the  Attorney-General's  office 
Department  that  probably  the  principal  work  of  enforcing  the 
of  Justice  Sherman  Act  will  continue  to  be  done  by  the  Depart- 

ment of  Justice,  whereas  the  Trade  Commission  will  act  largely 
under  the  Clayton  Law  and  the  prohibition  in  the  Trade  Commis- 
sion Law  against  unfair  methods  of  competition.  The  Department 
of  Justice  undoubtedly  will  seek  the  views  of  the  Trade  Commission 
regarding  dissolution  decrees  against  corporations  adjudged  to  be 
monopolies.  It  will  also  undoubtedly  turn  over  to  the  Commission 
a  large  number  of  voluntary  complaints  that  have  been  sent  in  dur- 
ing the  past  few  years  alleging  "  unfair  "  practices,  but  which  do  not 
charge  or  tend  to  prove  the  existence  of  monopoly.  The  Attorney- 
General's  office  takes  the  position  that,  where  cooperation  with  the 
Trade  Commission  is  not  ordered  by  law,  such  cooperation  will 
depend  entirely  on  the  discretion  of  the  Attorney-General.^ 

A  most  important  feature  of  the  Trade  Commission  Act  is  the 
provision  for  publicity.  The  Commission  can,  if  it  chooses,  hold 
Publicity  opcu  hearings,  and  it  can  make  public,  except  trade 

Tradrcom-^^  sccrcts  and  the  names  of  customers,  any  information 
mission  Act  which  it  sccs  fit.  This  pubhcity,  it  has  been  pointed 
out,  should  have  three  effects:  (i)  Where  excessive  profits  by  cor- 
porations are  shown,  competition  will  be  encouraged  to  enter  the 
field  —  that  is,  potential  competition  will  become  actual  competi- 
tion; (2)  labor  will  be  in  a  position  to  understand  whether  or  not  it 
is  being  properly  paid;  and  (3)  investors  will  be  enlightened  as  to 
the  value  of  their  securities.^  In  general,  the  publicity  features  of 
the  Trade  Commission  Law  are  among  its  most  important  provi- 
sions. If  taken  advantage  of  intelligently  and  in  the  proper  spirit, 

*  Federal  Trade  Reporter,  April  i,  1915,  pp.  207-08. 

*  Ibid.,  March  i,  1915,  p.  157.  . 


INDUSTRIAL  BONDS  279 

they  will  go  far  toward  bringing  about  a  solution  of  the  so-called 
trust  problem  and  toward  enabling  investors  to  appraise  the  se- 
curities of  any  given  corporation  in  their  true  light. 

Chairman  Davies,  of  the  new  Federal  Trade  Commission,  in  all 
his  public  utterances  lays  stress  on  the  fact  that  the  Trade  Com- 
mission Law  will  be  interpreted  not  in  terms  of  men-   p^j.^  ^^  ^^^ 
ace,  but  in  terms  of  constructive  helpfulness.  He  calls  Trade  Com- 

.  ,        -  ,  1       /^  •     •  in        mission  as  out- 

attention  to  the  fact  that  the  Commission  gradually   lined  by  Chair- 

.-,,  .    ,  •  r  J.  i.     c  man  Davies 

will  come  mto  possession  of  a  vast  amount  01  corre- 
lated information  in  regard  to  the  industries  and  business  of  the 
country  and  that  this  information,  except  trade  secrets  and  names 
of  customers,  will  be  available  to  Congress  and  the  people.  He 
calls  attention  also  to  the  fact  that  the  Commission  will  be  in  a 
position  to  settle  a  great  many  difficulties  without  Utigation.  He 
refers  to  the  power  of  the  Commission  to  stop  unfair  methods  of 
competition  as  the  power  which  will  kill  monopoly  in  the  seed  or 
cut  it  off  at  the  roots.  For  the  greatest  menace,  he  says,  to  the 
296,000-odd  small  corporations  in  this  country  is  the  unfair  meth- 
ods of  competition  used  by  the  comparatively  small  number  of 
large  corporations.  The  Trade  Commission  will  be  in  a  position, 
Uke  the  Interstate  Commerce  Commission,  to  give  continuous 
administrative  action;  the  Department  of  Justice  can  deal  only 
with  violations  of  law.  Mr.  Davies  considers  the  Trade  Commis- 
sion the  greatest  safeguard  since  the  Sherman  Law  for  preserving 
the  independence  of  small  concerns  and  keeping  open  the  channels 
of  trade.  If  his  ideas  are  followed,  the  Commission's  principal  work 
will  be  to  bring  business  into  harmony  with  the  law.  He  hopes  that 
its  work  will  result  in  a  new  era  of  good  feeling.^ 

One  of  the  leading  framers  of  the  law  feels  that  as  time  goes  on 
the  corrective  work  of  the  Commission  will  diminish  and  its  con- 
structive work  will  increase.2  Business  gradually  will   rp^.  ^  p 
become  adjusted  to  the  rulings  of  the  Commission  and   mission  in  a 
the  courts,  and  business  men  will  set  their  houses  in   drconstruc- 
order.  The  Commission  has  the  power  to  investigate   ^'^^  ^°^^ 
conditions  in  foreign  countries  and  to  make  recommendations 

^  See  Public  Service  Regulation,  January  i,  1915,  pp.  6-7;  ibid.,  January  15,  1915, 
pp.  39-42;  Federal  Trade  Reporter,  March  i,  1915,  pp.  134-36;  ibid.,  April  i,  1915,  pp. 
195-96;  Commercial  and  Financial  Chronicle,  vol.  100,  p.  1551. 

2  Senator  Newlands,  as  quoted  in  Public  Service  Regtdalion,  February  i,  19 15,  p.  70. 


28o     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

which  will  aid  in  the  development  of  our  foreign  trade.  It  is  in  a 
position  to  make  rulings  and  suggestions  which  may  be  of  im- 
mense benefit  to  general  business.  At  the  same  time,  according 
to  its  declared  intention,  the  Commission  will  not  act  as  a  board  of 
advice  to  business  men  in  entering  on  any  given  programme.^  It 
will  not  and  should  not  place  itself  in  a  position  to  approve  in  ad- 
vance any  given  act.  As  one  writer  has  put  it,  the  board  should  not 
be  a  body  of  men  to  which  business  men  can  run  and  ask  ques- 
tions. ^  At  the  same  time  the  commissioners,  according  to  their  own 
statement,  will  discuss  informally  with  business  men  various  phases 
of  their  business.^  The  whole  atmosphere  surrounding  the  enact- 
ment of  the  Trade  Commission  Act,  unlike  that  which  prevailed 
at  the  time  of  the  passage  of  the  Interstate  Commerce  Law,  is 
constructive  and  helpful.'* 

There  are  certain  precedents  applicable  to  a  greater  or  less  degree 
for  the  creation  of  the  Federal  Trade  Commission.  In  Canada,  the 

,     iudicial  processes  have  been  supplemented  by  a  pro- 
Precedents  and     •"  1.1  1   •  r  •    .        1 
analogies  for       ccdurc  which,  upon  complamt  of  persons  mjured, 

Trade  Com-  permits  the  question  of  attempted  monopolies  to  be 
mission  investigated  by  a  temporary  commission  appointed 

by  the  court.  In  Australia,  in  191 2,  there  was  created  an  Interstate 
Trade  Cormnission  with  a  character  of  permanency  and  of  expert 
qualifications  and  with  broad  powers  to  investigate  conditions 
and  enforce  the  laws  regarding  competition. 

Until  the  enactment  of  the  Trade  Commission  Law  in  the  United 
States,  the  governmental  machinery  for  the  prevention  of  monop- 
oly has  been  investigation  by  general  legislative 
stftutefregu-  commission  or  administrative  officers  and  the  insti- 
inission^or°"  tuting  of  court  proceedings  by  the  Department  of 
regulation  by      Justice.^  The  new  act  substitutes  for  what  has  been 

lawsuit  "^  .  .  . 

called  regulation  by  lawsuit  ^  regulation  by  a  con- 
tinuous administrative  body. 

1  Federal  Trade  Reporter,  April  i,  1915,  p.  196. 

^  R.  L.  Raymond  in  the  Journal  of  Political  Economy,  vol.  20,  p.  324. 

*  See  the  Annalist  (New  York),  April  26,  1915,  p.  405. 

*  Since  the  passage  of  the  law  the  United  States  Chamber  of  Commerce  has  ap- 
pointed a  committee  to  cooperate  with  the  Trade  Commission. 

^  Commissioner  Davies,  as  quoted  in  the  Boston  Evening  Transcript,  February  4, 

1915- 

*  R.  L.  RajTnond  in  Journal  of  Political  Economy,  vol.  20,  p.  319. 


INDUSTRIAL  BONDS  28 1 

The  Trade  Commission  Law  has  been  criticized  adversely  on 
these  grounds:  —  Certain  criti- 

(i)  The  Commission  has  no  authority  to  make  a  Tr^l  Com- 
favorable  report  or  order.  mission  Law 

(2)  It  is  not  empowered  to  recommend  any  rule  of  conduct  for 
the  future. 

(3)  It  is  not  permitted  to  allow  combinations  for  the  develop- 
ment of  foreign  trade. ^ 

The  last-named  power  could  not  be  given  without  amending  the 
Sherman  Law.  The  question  of  recommending  any  rule  of  conduct 
for  the  future  has  been  discussed.  As  to  giving  the  Commission 
authority  to  make  a  favorable  report  or  order,  this  does  not  seem 
to  us  important.  If  any  investigation  is  made  and  the  Commission 
does  not  make  an  unfavorable  report,  the  presumption  is  that  the 
practices  complained  of  are  not  illegal.  Again,  under  the  pubhcity 
features  of  the  law,  the  Commission  can  give  out  a  great  amount  of 
information,  if  it  wishes,  which  will  enhance  the  reputation  and 
credit  of  corporations. 

On  more  general  grounds,  there  has  been  a  great  deal  of  adverse 
as  well  as  much  favorable  criticism  of  the  Trade  Commission  Law. 
Some  people,  Hke  Senator  Sutherland  and  Robert  R.   „  . 

...  Various  ad- 

Reed,  think  that  the  Commission  is  clothed  with  un-   verse  criti- 
constitutional  powers.   Senator  Sutherland  speaks  of  Trade  Com- 
many  powers  of  the  Commission  as  retroactive.  He   ™^^^'°^  ^^' 
also  questions   the   constitutional  right  of   the  Commission  to 
exercise  semi-judicial  powers  over  all  corporations  engaged  in 
interstate   and  foreign  commerce.^    Robert  R.  Reed  considers 
that  if  Congress  has  regulative  power  over  all  corporations,  it 
has  no  authority  to  delegate  such  power.  ^  He  considers  also  that 
there  is  great  danger  of  the  creation  and  protection  of  monopoly 
under  a  federal  bureaucracy.'*  James  J.  Hill  fears  that  as  time  goes 
on  the  Federal  Trade  Commission,  like  the  Interstate  Commerce 
Commission,  will  constantly  be  given  increased  powers  and  that 
the  authority  which  it  has  already  over  all  business  is  dangerous  in 

*  See  Butler  and  Lynde,  The  Federal  Trade  Commission,  pp.  43-45. 
2  See  the  Sutiday  Herald  (Boston),  April  18,  1915. 

'  Commercial  and  Financial  Chronicle,  vol.  100,  p.  684. 

*  Atlantic  Monthly,  vol.  cvi,  p.  260. 


282      AIvIERICAN  AND  FOREIGN  INVESTMENT  BONDS 

the  extreme.^  The  law  has  been  criticized  also  on  the  ground  that 
ordinary  business  has  not  reached  the  stage  of  development  that 
the  railroads  have  reached,  and  that  any  such  rigid  control  of  in- 
dustry as  we  have  had  in  the  case  of  railroads  would  be  exceedingly 
harmful.^  Senator  Weeks  thinks  that  the  Trade  Commission  Act 
will  place  all  business  in  a  strait-jacket.  He  calls  attention  to  the 
fact  that  boards  are  "long,  narrow,  wooden  things."^  The  law  has 
also  been  criticized  on  the  ground  that  this  is  a  government  of 
laws  and  not  of  men.^  It  is  to  be  remembered  that  objections  of 
very  much  the  same  general  character  were  raised  at  the  time  of 
the  passage  of  the  Interstate  Commerce  Law. 

The  Federal  Trade  Commission  Act,  the  Clayton  Act,  and  the 
Sherman  Anti-Trust  Law  are  to  be  thought  of  together  as  embody- 
Soiution  of  the  ^^S  ^^^  ^^^  federal  legislation  dealing  with  the  trust 
trust  problem      problem.  This  legislation  has  reached,  in  our  opinion, 

IS  to  give  fair  ..  , 

play  for  com-  a  fairly  satisfactory  if  incomplete  stage.  The  real 
Fa%'p?ay^for  solution  of  the  trust  problem,  —  vital  to  investors  as 
combination        ^^jj  ^^  ^^  ^j^^  public,  —  in  the  opinion  of  the  best 

judges,  is  to  give  fair  play  for  competition  and  fair  play  for  combi- 
nation.^ In  other  words,  the  solution  lies  in  the  working-out  of 
economic  laws  without  interference,  except  in  so  far  as  that  inter- 
ference is  necessary  to  prevent  unfair  practices.  The  interpretation 
of  the  Sherman  Law  by  the  Supreme  Court  in  the  Standard  Oil  and 
American  Tobacco  cases  and  the  enactment  of  the  Clayton  and 
Trade  Commission  Laws  all  point  to  the  fact  that  the  highest  court 
and  Congress  have  come  to  the  conclusion  that  unfair  practices, 
rather  than  mere  combination,  are  what  should  be  prevented.^ 

The  wisdom  of  this  view  will  appear  still  more  clearly  when  we 
consider  the  unfortunate  history  of  some  of  our  great  combinations. 
Such  combinations  do  not  always  have  things  all  their  own  way, 
even  when  they  are  in  a  position  to  use  unfair  methods.  If  unfair 

^  Federal  Trade  Reporter,  March  i,  1915,  p.  139. 

*  W.  L.  Clause,  as  quoted  in  Federal  Trade  Reporter,  March  15,  1915,  p.  163. 
'  Federal  Trade  Reporter,  March  15,  1915,  p.  182. 

''  Commercial  and  Financial  Chronicle,  vol.  100,  p.  684,  and  Public  Service  Regula- 
tion, January  i,  1915,  p.  5. 

*  See  Journal  of  Political  Economy,  vol.  20,  p.  318. 

'  The  prohibition  against  holding  companies  would  seem  to  modify  this  statement 
considerably.  At  the  same  time,  as  stated  earlier,  there  is  nothing  in  the  Clayton  Law 
to  prevent  ownership  of  two  competing  corporations  by  the  same  individuals. 


INDUSTRIAL  BONDS  283 

methods  are  prevented,  competition  almost  certainly  will  prevent 
anything  like  monopoly  control.    If  any  corporation 
attempts  to  capitalize  its  control  over  markets  and   machinery 
if  it  can  maintain  this  control  only  by  mifair  meth-    pr^^enting^*'^ 
ods,  all  the  machinery  now  exists  for  bringing  such   monopoly 
control  to  an  end.  From  the  prohibition  of  unfair 
practices,  as  laid  down  by  decisions  of  the  Supreme  Court  under 
the  Sherman  Law,  as  laid  down  in  the  Clayton  Law,  and  as  will  be 
laid  down  under  the  interpretation  of  the  Trade  Commission  Act 
and  through  its  publicity  features,  potential  competition  will  be  in 
a  position  to  know  all  the  facts  and  become  actual  competition 
within  a  reasonable  time. 

No  laws  and  no  government  are  perfect.  Only  as  the  laws  are 
enforced  and  as  the  administrative  machinery  is  used  by  men  '■  can 
it  be  shown  whether  they  are  for  good  or  ill.  At  the 
same  time  there  is  nothing  in  the  experience  of  the   legislation  as  it 
United  States  or  of  other  countries  to  make  us  think   !?'t!l.!°"l^^ 

jUtiy  jjrovc 

that  in  the  long  run  the  trust  legislation,  as  it  exists   efFective  and 

"  .  beneficial 

to-day,  will  be  harmful.  It  may  be  very  beneficial.  If 
we  should  assume  that  the  great  majority  of  business  men  are  de- 
termined to  carry  on  their  business  in  a  dishonorable,  unfair,  and 
illegal  way,  it  would  undoubtedly  be  difficult  to  enforce  the  anti- 
trust laws  as  they  exist.  If  we  assume,  however,  that  most  busi- 
ness men  intend  to  do  somewhere  near  what  is  right  and  that  many 
business  men  are  exceedingly  glad  of  the  opportunity  to  understand 
more  clearly  how  to  conduct  their  business  in  accordance  with  the 
law,  the  enforcement  of  the  anti-trust  laws  and  the  work  of  the 
Trade  Commission  may  be  positively  constructive  and  beneficial. 
There  is  one  more  suggestion  that  has  been  made  for  public 
control  of  large  industrial  units  —  that  is,  federal  incorporation. 
Some  who  suggest  this  step  go  so  far  as  to  suggest  Federal 
government  control  of  prices  ^  under  certain  circum-  ^corporation 
stances.  Supervision  of  the  issue  of  securities  is  almost  always  a 
feature  of  this  plan.  Until  the  present  body  of  law  has  been  tried 

^  The  personnel  of  the  new  Trade  Commission  has  been  criticized  by  ex-President 
Taft  and  others.  The  effectiveness  of  the  present  Commission's  work  remaias,  of 
course,  to  be  seen.    (See  Federal  Trade  Reporter,  June  15,  1915,  p.  362.) 

'  See  William  Randolph  Hearst  in  the  Boston  American,  January  26,  1914. 


284      MIERICAN  AND  FOREIGN  INVESTMENT  BONDS 

out,  however,  it  seems  to  us  hardly  necessary  to  undertake  federal 
incorporation.  In  general,  public  control  of  industrial  corporations, 
owing  to  the  presence  of  keen  competition,  should  be  much  less 
close  and  much  less  severe  than  in  the  case  of  steam  railroads  or  of 
public-service  corporations. 

It  may  throw  a  good  deal  of  light  on  the  actual  working-out  of 

the  so-called  trust  problem,  especially  in  its  bearing  on  the  safety 

as  a  class  of  industrial  bonds,  to  consider  in  a  general 

Corporate  pro-  .       .     ,  .    ,  .  . 

motions  and  way  ccrtam  mdustrial  promotions  and  reorganiza- 
reorganiza  ions    ^^^^^    jy^  Arthur  S.  Dcwing,  of  Yale  University,  has 

published  in  the  Harvard  Economic  series  a  very  careful  and  read- 
able book  discussing  certain  typical  corporate  promotions  and  reor- 
ganizations. We  will  outline  briefly  some  of  the  general  principles 
which  he  considers  estabhshed  and  will  illustrate  these  with  a  few 
examples. 

The  purposes  of  the  promotions  or  consolidations  which  Profes- 
sor Dewing  considers  were  mainly  two:  (i)  To  reaUze  the  economies 
Certain  ex-  ^^  largc-scale  productiou;  and  (2)  to  eliminate  compe- 
periencesin         tition    or    obtain    mouopoly    control.^     Experience 

economies  of 

large-scale  showcd  that  of  ten  extravagant  conndence  was  placed 

production  and      •       ,i  •  r  i  i  j.*  mi  • 

m  monopoly  m  the  economics  of  large-scale  operation.  Ihis  was 
control  ^j^g  ^g^gg  ^^Yi  the  cordage,  malting,  asphalt,  and  ship- 

building promotions.  In  these  instances  the  expenses  of  promotion 
and  other  disadvantages  more  than  offset  the  estimated  economies. ^ 
In  the  matter  of  monopoly  control,  thirteen  combinations  showed 
an  average  degree  of  control  or  average  percentage  of  total  produc- 
tion of  about  fifty-four  per  cent.  In  individual  cases,  the  percent- 
age of  production  ranged  from  only  about  seventeen  per  cent  in 
the  case  of  the  National  Salt  Company  to  about  eighty-five  per 
cent  in  the  case  of  the  Glucose  Sugar  Refining  Company.  ^  There 
seemed  to  be  no  correspondence  between  the  degree  of  control 
and  the  subsequent  success  or  failure  of  the  business.  The  two 
concerns  having  as  large  a  degree  of  control  as  any  considered  — 

'    ^  Dewing,  Corporate  Promotions  and  Reorganizations,  p.  523. 

2  Ibid.,  pp.  4,  537-39- 

*  Concerns  not  reorganized  having  an  unusually  large  degree  of  control  were  the 
American  Tobacco  Company  in  the  cigarette  business  and  the  American  Chicle 
Company  in  the  chewing-gum  business.  Each  of  these  concerns  controlled  about 
ninety  per  cent  of  the  American  output.  {Ibid.,  p.  525.) 


INDUSTRIAL  BONDS  285 

the  glucose  and  asphalt  combinations  —  were  stifled  within  two 
years.  ^ 

The  prospective  profits  of  the  combination  usually  were  esti- 
mated and  the  capitalization  arrived  at  on  the  basis  of  past  earn- 
ings —  a  basis  which  proved  very  unrehable.    The 
average  earnings  turned  out  to  be  just  two  thirds  the   earnings  to 

,.   .       ,     ,  „  meet  estimates 

amount  anticipated.'^ 

In  the  matter  of  capitalization,  the  average  proportion,  in  the 
case  of  fourteen  combinations,  between  tangible  assets  and  total 
capitalization  was  about  forty  per  cent.  It  is  interest-  proportion  be- 
ing to  note  that  the  two  concerns  having  the  largest  ^^^^If^  Ind^Std 
percentage  of  control  of  any  considered  —  the  Glu-  capitalization 
cose  Sugar  Refining  Company  and  the  Asphalt  Company  of  Amer- 
ica —  each  had  as  small  a  percentage  of  tangible  assets  to  total 
capitalization  as  any  considered.^  This  indicates,  of  course,  capi- 
talization of  monopoly  control. 

Not  the  proportion  between  the  tangible  assets  and  the  total 
capitalization,  but  the  form  which  the  capitalization  took,  proved 
important  in  times  of  difficulty.   Issue  of  bonds  or   Form  of  capi- 
obligations  entailing  a  fixed  rate  of  interest  often   imponTntThan 
resulted  in  trouble  in  times  of  general  depression  or   amount 
when  earnings  fluctuated  from  any  cause.  ^ 

In  the  cases  of  thirty-one  reorganizations  discussed  in  Professor 
Dewing's  book  as  due  to  financial  difficulties,  the  failures  took 
many  forms  —  ranging  from  inability  to  earn  even   various  degrees 
the  operating  expenses  of  the  business  to  inability  to   °^  failure 
earn  and  pay  normal  wages,  normal  interest,  and  normal  profit. 

Examination  of  the  various  failures  showed  the  inadequacy  of 
mere  consolidation  as  a  basis  for  economic  efficiency.  From  a  busi- 
ness point  of  view  there  were  two  leading  causes  of   , 

r   .,  /   \    T      1  •!•  1       •  1      •    •  •  Leadmg  busi- 

f allure:  (i)  Inability  to  obtain  administrative  man-   ness  causes 
agement  capable  of  handling  a  large  situation;  and 
(2)  inabiHty  to  dominate  the  industry  in  the  presence  of  actual  or 
potential  competition.^ 

^  Dewing,  Corporate  Promotions  and  Reorganizations,  p.  527. 
*  Ibid.,  p.  546.  The  promotion  of  the  American  Hide  and  Leather  Company  illus- 
trated an  extreme  case  of  failure  to  realize  the  estimates. 

»  IbU.,  pp.  531-33.  *  Ibid.,  p.  534.  s  Ibid.,  p.  558. 


286     MIERICAN  AND  FOREIGN  INVESTMENT  BONDS 

There  were  almost  always  present  three  sources  of  competition : 

(i)  Old  competitors  not  absorbed  by  the  combination;  (2)  old 

competitors  who  had  sold  out;  and  (i)  new  competi- 

Three  sources  ^  '  ^^/  •      i   • 

of  possible  tors  attracted  by  the  exorbitant  profits  promised  in 

competition  ,.  .        ,  , 

promotion  circulars.^ 

In  all  the  failures  discussed  in  Professor  Dewing's  book,  with  the 

possible  exception  of  the  American  Bicycle  Company,  the  direct 

Direct  cause        causc  of  failure  was  the  deflection  of  working  capital 

of  failure  to  the  payment  of  interest  and  dividends;  or,  to  put  it 

deflection  of  .  ^    -^  ,  ,        . 

working  capi-      in  another  way,  the  placing  of  bonds  on  untried  indus- 
of  in'terc^t'^nd     trial  enterprises  and  the  lack  of  conservatism  in  de- 
^'  ^'^  ^  daring  dividends.   In  the  year  before  failure  or  reor- 

ganization, eighteen  out  of  twenty-four  corporations  paid  either 
unearned  interest  or  unearned  dividends.  The  motives  for  paying 
unearned  dividends  usually  were:  (i)  To  make  a  market  for  the 
company's  securities;  (2)  to  return  an  income  on  the  holdings  of 
directors.  Evidence  goes  to  show  that  if  the  assets  had  been  con- 
served, failure  in  most  cases  could  have  been  avoided  and  a  larger 
ultimate  return  to  security-holders  obtained.^ 

A  brief  summary  of  some  of  the  causes  of  failure  in 
ure  in  certain      the  cases  of  Certain  large  industrial  concerns  may  be 

individual  cases        r  •    ,  .  •>        j        .,,1        r  1   •      ^i        j_    1  i 

of  mterest,"*  and  will  be  found  in  the  table  on  pages 
287-88.    These  are  not  all  the  failures  discussed  in  Professor  Dew- 
ing's book,  but  they  are  the  leading  ones. 
A  consideration  of  the  causes  of  failure  in  individual  cases  to- 
gether with  the  causes  in  general  discussed   earlier 

Bonding  of  i       r   n        •  1      • 

industrial  con-     leads  One  to  the  tollowing  conclusions :  — 

cerns  should  be  /   \  m-i     .      j,  .      ,  '^    ^'  j 

undertaken  \j)  Ihat  attempts  to  Capitalize  and  exercise  mon- 

with  great  care  opoly   control,  unlcss   backed   up   by  unfair 

methods,  are  futile.^ 

^  Dewing,  Corporate  Promotions  and  Reorganizations,  p.  563. 

2  Dewing,  pp.  550-51.  5S7-S8. 

3  Ihid.,  pp.  16-17, 24-25,  57-61,  65-70,  79,83-86,  93-98,  112-13,  123-25,  133,  141, 
147, 150-51,  157-59,  164,  166-69,  i77~79)  182,  185-86,  197,  203-04,  210-12,  214,  220- 
21, 225-26,  232,  234, 236-37,  239-42,  248,  249,  259, 263-64, 268,  286-89,  294-96,  304, 
318-24,  330-31.  335.  340-43.  346,  354-56,  360,  363-64.  367,  371-72,  374-76,  399,  411- 
13.  432-33.  437.  441-43,  445.  447,  45i,  462-65,  496-99.  5o8. 

*  Attempts  to  exercise  monopoly  control  require  usually  either  (i)  maintaining 
prices  on  an  artificial  level  by  absorbing  all  the  surf)lus  su[iplics,  as  the  National  Cord- 
age Company  attempted  to  do;  or  (2)  cutting  prices  to  kill  competition,  as  the  Asphalt 
Company  and  the  Com  Products  Company  in  its  early  days  tried  to  do.  (Dewing, 
p.  600.) 


INDUSTRIAL  BONDS 
BUSINESS  FAILURES 


287 


Concern 


United  States  Leather  Company 


National  Starch  Manufactviring 
Company 


National  Starch  Company 
Glucose  Sugar  Refining  Company 

Com  Products  Company 

National  Cordage  Company 
United  States  Cordage  Company 


Standard  Rope  &  Twine 
Company 

Standard  Cordage  Company 


Westinghouse  Electric  &  Manu- 
facturing Company  (two 
reorganizations) 


National  Salt  Company 


Causes  of  failure 


Tanning  industry  not  svuted  to  large-scale  produc- 
tion. Small  plant  investment,  but  large  working 
capital  required.  Raw  material  purchased  and 
finished  product  sold  under  conditions  of  keen 
competition.  General  business  depression 
1893-98.  Issue  of  8%  cimiulative  preferred 
stock  largely  to  acquire  unproductive  timber 
lands. 

Poor  condition  of  some  of  the  plants.  Heavy  fixed 
and  contingent  charges.  Competition.  Busi- 
ness depression  following  the  panic  of  1893. 
Mismanagement. 

Increase  in  fixed  charges.  Attempt  at  monopoly 
control.  Mismanagement. 

Poor  condition  of  plants  and  inadequate  provision 
for  renewals.  Overcapitalization.  Competition. 
Mistaken  trade  policy  and  unwise  dividend 
pohcy.   Expensive  Utigation. 

Capitalization  of  monopoly  control.  Adverse 
trade  conditions  including  vigorous  competi- 
tion. Neglect  of  depreciation  and  obsolescence. 
Unwise  payment  of  di\ddends.  Inefficient 
management. 

Capitahzation  of  monopoly  control.  Payment  of 
large  dividends.  Neglect  of  business  by  officers 
for  speculation  in  company's  securities. 

Inadequacy  of  reorganization  of  National  Cordage 
Company.  Inability  to  control  competition. 
"Banker"  management. 

Keen  competition.  Lack  of  single-mindedness  on 
the  part  of  officers. 

Heavy  burden  of  debt.  Inefficiently  equipped 
mills. 

Lack  of  conservatism  of  Mr.  Westinghouse. 
Rapid  expansion  involving  heavy  plant  invest- 
ment. Lack  of  profit  in  foreign  subsidiaries. 
Lack  of  working  capital.  Unconservative  divi- 
dend policy.  Accumulation  of  large  floating 
debts. 

Attempt  at  monopoly  control.  Extravagant  con- 
tracts. Inability  to  maintain  monopoly  prices 
—  due  to  overproduction  and  the  increase  of 
competition. 


288      AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 
BUSINESS   FAILURES    {continued) 


Concern 


United  States  Realty  &  Con- 
struction Company 


American  Bicycle  Company 


Pope  Manufacturing  Company 
(1907) 


American  Malting  Company 


New  England  Cotton  Yam 
Company  (1903) 


Union  Mills  Company 


Mount  Vernon-Woodberry  Cot- 
ton Duck  Company 

United  States  Cotton  Duck 
Corporation 

Consolidated  Cotton  Duck 
Company 

International  Cotton  Mills 
Corporation 

Asphalt  Company  of  America 
National  Asphalt  Company 


United  States  Shipbuilding 
Company 


Causes  of  failure 


Overestimate  of  earning  power  and  overcapitali- 
zation. Speculation  in  land  and  securities. 
Difficulties  arising  from  relations  with  labor. 
Unsound  methods  of  accounting.  Financial 
depression  of  1903. 

Passing  of  the  bicycle  craze  and  general  collapse 
of  the  industry. 

Attempt  to  manufacture  automobiles  and  conse- 
quent necessity  for  new  equipment.  Lack  of 
working  capital. 

Inability  to  control  competition.  Failure  to  real- 
ize economies  of  large-scale  production.  Lack 
of  loyalty  on  the  part  of  officers.  Payment  of 
unearned  dividends. 

Incapable  management.  Unwise  trade  policy. 
Increased  costs  of  raw  material  and  labor. 
Unconservative  dividend  policy. 

Difficulty  of  managing  so  large  an  enterprise. 
Burdensome  lease  of  the  New  England  Cotton 
Yarn  Company. 

Industry  not  suited  to  consoUdation.  Unwise 
issue  and  retention  of  mortgage  bonds.  Inabil- 
ity to  obtain  management  able  to  cope  with  the 
situation.  Competition.  Inadequate  charges 
to  depreciation.  Attention  to  market  for  com- 
pany's securities  to  the  neglect  of  the  business. 
Complicated  financial  structure. 


Capitalization  of  monopoly  control.  Heavy  fixed 
charges.  Development  of  new  process  for  mak- 
ing asphalt.  Interference  of  Venezuelan  Gov- 
ernment. Severe  competition.  Lack  of  loyalty 
of  higher  officers. 

Shipbuilding  at  time  of  promotion  unusually  un- 
profitable. Promotion  under  conditions  of  in- 
flation and  misrepresentation.  Placing  of 
bonded  debt  on  the  properties.  Financial  de- 
pression of  1903.  Lack  of  working  capital. 
Unavailability  of  the  earnings  of  the  Bethlehem 
Steel  Company,  the  only  prosperous  subsidiary. 


INDUSTRIAL  BONDS  289 

(2)  That  good  management  is  the  most  important  factor  in 
success. 

(3)  That  the  competitive  and  fluctuating  conditions  surrounding 
industrial  enterprises  make  the  bonding  of  such  concerns 
advisable  only  under  carefully  chosen  circumstances  and 
carefully  guarded  restrictions. 

To  state  the  problem  in  another  way :  Generally  speaking,  only 
those  concerns  organized  to  prosper  under  conditions  of  competi- 
tion should  be  bonded,  and  then  only  to  an  amount  the  fixed 
charges  on  which  can  be  met  easily  in  times  of  depression.^ 

Whether  bonded  or  not,  the  financial  structure  of  an  industrial 
concern  should  be  built  with  a  view  to  its  permanent  adaptability 
to  the  industry.    In  order  to  succeed,  the  concern    „       , 

-'  _  '  General  con- 

must  pursue  a  sound  trade  poHcy  and  a  sound  finan-   ditions  neces- 

.  sary  to  success 

cial  policy.  Some  of  the  most  conspicuous  successes  of  industrial 
among  industrial  concerns  are  not  bonded  at  all, 
pursue  in  general  the  policy  of  manufacturing  a  first-class  product 
and  selling  it  on  a  small  margin  of  profit  or  at  a  reasonable  price, 
and  make  no  attempts  at  monopoly  control.  Among  such  concerns 
may  be  mentioned  the  American  Radiator  Company,  the  General 
Chemical  Company,^  and  the  Ford  Motor  Company. 

In  reorganizations,  efforts  usually  have  been  made  to  remedy 
two  sets  of  conditions:  (i)  Trade  conditions;  (2)  errors  of  capitali- 
zation.   Sometimes  the  policy  has  been  pursued  of   ^         .    . 

^         -^  ^  Reorganizations 

attempting  to  increase  control  of  the  market  —  as  aim  to  correct 
in  the  cases  of  the  National  Starch  Manufacturing  tions  and  errors 
Company,  the  Glucose  Sugar  Refining  Company,  the  °  "^^^^^^  ization 
National  Salt  Company,  and  the  Asphalt  Company  of  America. 
As  to  correcting  errors  of  capitalization,  efforts  in  this  direction  — 
as  in  railroad  reorganizations  —  have  been  directed  principally 
toward  Hghtening  the  burden  of  fixed  charges.^ 

Industrial  reorganizations  have  been  formulated  mainly  on  the 
theory  that  the  difficulties  to  be  corrected  were  in-   Capitalization 
herent  in  the  particular  concern  under  consideration   and"in"ranroad 
rather  than  due  to  temporary  general  conditions  —   reorganizations 

^  This  is  without  taking  into  consideration  control  of  patents  or  of  valuable  sources 
of  raw  material  or  ownership  of  real  estate  referred  to  earlier  in  this  chapter. 
*  Dewing,  pp.  544,  601-02.  ^  Ibid.,  pp.  602-03. 


290     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

as  has  been  the  case  so  often  in  railroad  reorganizations.  In 
practically  all  railroad  reorganizations,  the  total  capitalization  has 
been  greater  after  reorganization  than  before.  In  thirty-two  indus- 
trial reorganizations  considered  by  Professor  Dewing,  on  the  other 
hand,  the  total  of  new  securities  has  been  only  eighty-nine  per  cent 
of  the  old.  There  has  been,  however,  an  increase  in  the  proportion 
of  bonds  —  in  which  these  reorganizations  have  been  markedly 
unlike  the  leading  railroad  reorganizations  of  1893  to  1898.^ 
In  twenty-seven  industrial  reorganizations,  the  new  fixed 
charges  have  been  seventy-eight  per  cent  of  the  old. 

Fixed  charges 

in  industrial  Frequently  the  principal  of  the  Hen  has  been  increased, 
reorganizations    ^^^  ^^^  interest  rate  on  the  new  bonds  has  been 

less  than  on  the  old.^ 

As  in  railroad  reorganizations,  where  there  has  been  foreclosure, 

minority  bondholders  have  been  paid  off  in  accordance  with  the 

foreclosure  price.    This  is  almost  sure  to  be  much 

Treatment  of  i        r  i  r     i         i    i  x        i 

bondholders  in  less  than  the  facc  value  01  the  debt.  In  the  case  of 
reorganizations  ^^^  Asphalt  reorganization,  minority  bond-holders 
received  only  eleven  per  cent  of  the  par  value  of  their  bonds. 
Bondholders  who  have  gone  into  reorganizations,  whether  after 
foreclosure  or  not,  usually  have  received  new  income  bonds  or 
preferred  stock.'  Sometimes  the  debt  has  not  been  disturbed,  as 
in  the  case  of  the  United  States  Leather  Company  debentures.^ 
We  give  on  page  291  a  table  showing  reorganiza- 
bondholders  in     tions  involving  sacrifices  by  bondholders.^   An  exam- 

reorganizations      ^^^^^^^  ^f  ^^^  ^^^^^  gj^^^S  ^^^^^  J^  tWO  CaSCS—  that  of 

the  Standard  Rope  and  Twine  Company  and  that  of  the  National 
Asphalt  Company  —  there  was  an  assessment  on  bondholders. 
The  new  securities  obtained  in  exchange  for  old  bonds  were :  in  two 
cases  —  the  United  States  Cordage  Company  and  the  Standard 
Rope  and  Twine  Company  —  income  bonds;  in  one  case  —  the 
National  Cordage  Company  —  first  preferred  stock;  in  one  case  — 

1  De\\ang,  pp.  611-14.  =*  Ibid.,  pp.  611-13.  '  Ibid.,  p.  594. 

♦  Ibid.,  p.  35.  Other  usual  features  of  industrial  reorganizations  have  been: 
Surrender  by  preferred  stockholders  of  their  claim  to  cumulative  dividends  and  the 
acceptance  of  a  security  bearing  a  lower  rate  of  income;  severe  cutting-down  of  the 
par  value  of  the  holdings  of  common  stockholders;  and  furnishing  of  new  money  either 
by  bankers  or  by  assessment  of  old  security-holders. 

fi  Ibid.,  p.  594. 


INDUSTRIAL  BONDS 


291 


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292     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

the  American  Bicycle  Company  —  second  preferred  stock;  in  two 
cases  —  Mt.  Vernon-Woodberry  Cotton  Duck  Corporation  and 
the  Asphalt  Company  of  America  —  preferred  stock  to  the  extent 
of  fifty  per  cent  of  the  old  bonds;  and  in  one  case  —  the  National 
Asphalt  Company  —  common  stock  to  the  extent  of  forty  per  cent 
of  the  old  bonds. 

All  industrial  reorganizations  considered  have  sought  to  relieve 

the  accumulated  and  unmanageable  floating  debt  brought  about 

by  the  deflection  of  money  from  the  needs  of  the  busi- 

Summary  of  i     t    •  i        i  a  n 

industrial  ncss  to  the  payment  of  mterest  and  dividends.   All 

reorganizations  •      -  •  i.  i  a.      i        ^      •  i 

reorgamzations  have  sought  also  to  improve,  when 

necessary,  trade  conditions.    As  a  whole,  they  have  sought  "to 

achieve  the  financial  rehabilitation  of  the  corporation  along  lines 

leading  to  permanent  success."  ^ 

All  the  considerations  discussed  so  far  in  this  chapter  are  of  a 

more  or  less  general  nature.   In  trying  to  determine 

Necessary  to  °  ,  .  .  . 

consider  each  thc  Safety  of  any  given  industrial  bond  issue,  it  is 
issue  on  its  Hcccssary  to  confinc  one's  attention  to  the  individual 
own  merits  property  and  business  and  the  conditions  surround- 
ing it. 

Examples    of    strong    industrial    bond    issues    are:  American 
Agricultural  Chemical  5%  October  i,  1928;  General  Electric  5% 

September  i,  1952;  Swift  &  Company  5%  July  i, 
strong  indus-       1944;  Westcm  Elcctric  $%  December  31,  1922.  The 

American  Agricultural  Chemical  Company  controls 
a  large  amount  of  phosphate  rock  —  a  material  necessary  for  the 
manufacture  of  commercial  fertilizers;  owns  and  operates  over 
fifty  plants  in  various  parts  of  the  United  States;  has  a  large 
amount  of  net  quick  assets;  and  has  shown  its  abiHty  to  make  good 
net  earnings  over  a  long  series  of  years  and  even  in  times  of  general 
business  depression.  The  General  Electric  Company  controls  valu- 
able patents;  has  an  unusually  large  amount  of  net  quick  assets 
compared  with  its  debt;  and  has  shown  its  ability  to  earn  even 
under  adverse  circumstances  many  times  the  interest  charges  on 
its  bonds.  Swift  &  Company  have  a  plant  investment  over  twice 
the  amount  of  the  mortgage  bonds,  and  must  have  at  all  times  net 
quick  assets  equal  at  least  to  the  amount  of  the  debt.  The  Western 

*  Dewing,  p.  614. 


INDUSTRIAL  BONDS  293 

Electric  Company  has  total  assets  over  four  times  the  amount  of 
its  debt,  and  must  always  have  net  quick  assets  at  least  double 
the  amount  of  these  bonds  outstanding.  Many  other  examples 
of  strong  industrial  bond  issues  could  be  given. 

We  give  below  prices  on  July  3,  1914,  or  the  near-  pnces  of  kad- 
est  date,  of  certain  leading  industrial  bond  issues   b^o^nd^fssuS^ 
listed  on  the  New  York  Stock  Exchange.^  '°  ^914 

PRICES   JULY   3,    1 9 14    OF    LEADING   INDUSTRIAL    BONDS  — 
PRICES    "AND    INTEREST." 
Issue  Price 

American  Agricultural  Chemical  5%  1928 ioo| 

American  Hide  &  Leather  6%  1919 102  j 

American  Ice  Securities  6%  1925 89 

American  Thread  4%  1919 94^ 

American  Tobacco  6%  1944 i2i| 

American  Writing  Paper  5%  1919 65 

Baldwin  Locomotive  Works  5%  1940 103I 

Bethlehem  Steel  5%  1926 99 

Central  Leather  5%  1925 99I 

Corn  Products  Refining  5%  1931 94I 

Distillers  Securities  5%  1927 58^ 

E.  I.  du  Pont  Powder  4!%  1936 86 

General  Electric  3^%  1942 79 

General  Motors  6%  1915 loof 

International  Paper  6%  1918 99I 

International  Steam  Pump  5%  1929 44 

New  York  Air  Brake  6%  1928 97 

Republic  Iron  &  Steel  5%  1934 104I 

Standard  Milling  5%  1930 88 

The  Texas  (Oil)  6%  1931 102 

Union  Bag  &  Paper  5%  1930 85^ 

U.  S.  Realty  &  Improvement  5%  1924 83I 

U.  S.  Rubber  6%  1918 102I 

U.  S.  Steel  5%  1963 103 

Western  Electric  5%  1922 ioi| 

Westinghouse  Electric  &  Manufacturing  5%  1931 95! 

This  table  indicates  the  wide  variation  in  degree  of  safety  of  differ- 
ent issues.  We  have  here  bonds  selling  all  the  way  from  44  per  cent 
of  their  par  value  to  i2i|  per  cent.   The  "income  basis"  or  net 

^  Commercial  and  Financial  Chronicle,  vol.  99,  p.  35. 


294     AMERICAN  AND  FOREIGN  INVESTMENT  BONDS 

return  of  some  of  the  issues  hardly  is  worth  trying  to  figure;  that  of 
some  of  the  highest  priced  issues  —  such  as  American  Agricultural 
Chemical  5  per  cents,  American  Tobacco  6  per  cents,  Baldwin 
Locomotive  5  per  cents,  General  Electric  3I  per  cents,  RepubUc 
Iron  and  Steel  5  per  cents.  United  States  Steel  5  per  cents,  and 
Western  Electric  5  per  cents  —  is  less  than  5  per  cent. 

The  European  War  has  changed  greatly  the  business  and  pros- 
pects of  many  of  our  leading  industrial  concerns.  Those  companies 
Effect  of  the  receiving  orders  for  munitions  and  other  war  suppHes 
on  industrid^"^  ^^"^^  shown  a  great  increase  in  business.  Among  these 
bonds  jnay  be  mentioned  the  Bethlehem  Steel  Corporation, 

E.  I.  du  Pont  de  Nemours  Powder  Company,  and  the  Westing- 
house  Electric  and  Manufacturing  Company.  The  bonds  of  all 
these  companies  were  selling  in  July,  1915,^  at  considerably  higher 
prices  than  they  sold  in  July,  19 14. 

We  have  not  meant  to  say  in  this  chapter  that  all  industrial 

bond  issues  are  less  safe  than  all  railroad  or  public-service  issues. 

,        Throughout  this  book  we  have  tried  to  lay  stress  on 

industrial  bonds   the  fact  that  cach  bond  issue  of  any  kind  must  be 

for  investment       .11.^  '^        a  j^  .i  .  •  i     r     1 

requires  judged  on  its  own  merits.  At  the  same  time  we  do  feel 

great  care  ^j^^^  ^j^^  Conditions  surrounding  the  issue  of  industrial 

bonds  prompt  greater  care  in  the  selection  of  such  bonds  than  do 
the  conditions  surrounding  any  other  well-known  classes  of  invest- 
ment bonds. 

^  See  Commercial  and  Financial  Chronicle,  vol.  loi,  p.  37. 


CONCLUSION 

This  book  has  been  completed  in  the  midst  of  a  period  of  world- 
wide upheaval.  The  relation  of  peoples  to  their  governments,  the 
trade  relations  between  the  great  nations  of  the  world,  and  the  rela- 
tive positions  of  those  nations  in  the  leadership  of  civilization  are 
in  process  of  change.  One  fact  only,  perhaps,  is  clear  even  now: 
that  the  United  States  rapidly  is  attaining  a  position  of  power 
which  it  never  has  held  before.  Not  only  is  the  broad  basis  for  the 
safety  of  American  securities  greater  than  ever  before,  but  the 
United  States  is  approaching  the  position  of  furnishing  the  leading 
market  for  the  securities  of  other  nations. 

It  is  hoped  that  this  book  has  thrown  some  Hght  on  the  leading 
principles  governing  investment  in  bonds. 


THE  END 


APPENDIX 
COUNTY  AND  MUNICIPAL  DEFAULTS 

EARLY  PERIOD 

Elizabeth,  New  Jersey,  defaulted  interest  on  its  city  bonds  February 
I,  1879.  The  cause  of  the  default  was  the  spirit  of  speculation  and  the 
desire  for  local  improvements  prevailing  from  1869  to  Elizabeth, 
1873.  The  city  loaned  its  credit  liberally  for  improve-  New  Jersey 
ments,  and  levied  assessments  by  the  linear  foot  to  reimburse  itself.  In 
1875,  a  court  decision  held  that  assessments  should  be  made  according 
to  the  "present"  benefit  derived  by  property-owners  from  the  improve- 
ments. As  many  of  the  improvements  had  deteriorated  greatly  in  value, 
the  city  thereby  was  burdened  directly  with  a  debt  of  about  $3,000,000.^ 
Later,  the  city  had  difficulty  in  collecting  taxes.^  Citizens  then  set  up 
claims  of  unconstitutionaUty  and  illegaUty  in  the  issue  of  the  bonds. 
Judgments  were  obtained,  however,  by  bondholders.^  June  3,  1880,  the 
New  Jersey  Supreme  Court  confirmed  the  judgment  of  the  lower  court, 
upholding  the  validity  of  the  bonds.'*  The  United  States  Circuit  Court 
denied  a  motion  for  the  appointment  of  a  receiver  or  trustee  for  the  city.^ 
Later  the  legislature  gave  authority  to  Elizabeth  to  compromise  this 
debt.^  At  first,  fairly  Uberal  terms  for  the  bondholders  were  sug- 
gested.'' Elizabeth  soon  put  forward  the  claim,  however,  of  inabiHty 
to  pay  more  than  fifty  cents  on  a  dollar.  In  1882,  the  debt  with  interest 
amounted  to  $6,700,000,  while  the  total  value  of  the  taxable  property 
was  only  $12, 182, 03 5. ^  Later,  the  court  issued  an  order  for  the  city  to 
show  cause  why  it  should  not  pay  its  debt.  A  similar  previous  order  had 
caused  five  out  of  eight  assessors  to  resign  before  the  order  was  served 
against  them.'  In  July,  1888,  a  resolution  of  the  City  Council  was 
passed  authorizing  the  Mayor,  Comptroller,  and  the  Commissioners  of 
the  Sinking-Fund  to  issue  4%  adjustment  bonds  for  old  obUgations  of 
the  city  at  a  rate  not  higher  than  fifty  per  cent  of  their  par  value  and 
accrued  interest.^'' 
Memphis,  Tennessee,  defaulted  interest  January  i,  1873.^^  In  1877, 

^  Commercial  and  Financial  Chronicle,  vol.  28,  p.  146. 

^  Ibid.,  vol.  29,  p.  120.  ^  Ibid.,  vol.  29,  p.  563.  *  Ibid.,  vol.  35,  p.  602. 

»  Ibid.,  vol.  29,  p.  277.  6  Ibid.,  vol.  32,  p.  312.  »  Ibid.,  vol.  30,  p.  581. 

*  Ibid.,  vol.  30,  p.  589.  ^  Ibid.,  vol.  32,  p.  368.         »"  Ibid.,  vol.  47,  p.  50. 

"  Investors'  Supplement,  Commercial  and  Financial  Chronicle,  January  26,  1878, 
p.  10. 


298  APPENDIX 

the  so-called  "  Flippen"  compromise  of  fifty  cents  on  a  dollar  of  principal 
Memphis,  and  interest  in  new  thirty-year  6%  bonds  was  arranged.^ 

Tennessee  -pj^g  Mayor  of  the  city,  in  a  message  to  the  City  Council 

a  few  years  before,  had  referred  to  the  judgment  of  the  United  States 
Circuit  Court  on  certain  bonds  of  the  city  of  Memphis.  The  Mayor  said 
that  for  one  lot  of  $67,000  bonds  issued,  the  city  had  received  only 
$17,789.17.  It  was  the  duty  of  the  city,  said  the  Mayor,  to  resist  pay- 
ment beyond  "price  or  sum  reaUzed,  or  the  price  paid  for  them  by  the 
holder,"  with  the  legal  rate  of  interest  added.  A  local  newspaper  esti- 
mated the  whole  amount  of  questionable  bonds  as  about  $2,450,000.  It 
claimed  that  the  city  never  had  realized  more  than  an  average  of  forty- 
two  cents  on  a  dollar  of  this  amount  —  "  Say  it  reahzed  fifty  cents,  which 
will  answer  as  probably  covering  cost  of  litigation."  ^ 

0\\ang  to  a  yellow-fever  epidemic  in  1878,  the  city  again  was  unable  to 
take  care  of  its  obligations.  A  repudiation  meeting  of  citizens  was  held.' 
January  29,  1879,  the  Tennessee  Legislature  passed  two  bills  repealing 
the  city  charter  of  Memphis  and  creating  the  "  Taxing  District  of  Shelby 
County."  ^  The  lower  court  appointed  a  receiver  for  the  city,^  but  this 
action  later  was  invaUdated  by  the  United  States  Supreme  Court.® 
Later  still,  the  United  States  Circuit  Court  at  Memphis  held  the  taxing 
district  liable  for  the  old  debt  of  the  city.'  This  old  debt,  not  previously 
compromised,  finally  was  funded  at  fifty  cents  on  a  dollar  into  new  bonds 
bearing  interest  for  the  first  three  years,  from  January  i,  1881,  at  3%, 
for  the  next  three  years  at  4%,  and  thereafter  at  6%.  The  lower  interest 
rates  were  to  be  capitalized,  so  as  to  give  the  holders  6%.  The  "  Flip- 
pen"  compromise  bonds  were  exchangeable  at  par.*  Including  capitali- 
zations, the  settlement  was  effected  at  an  average  rate  of  60.53%.  From 
July,  1889,  interest  on  the  so-called  "Tax  District"  4-6  per  cents  and  on 
the  "Flippen"  stamped  bonds  was  paid  at  the  rate  of  6%  per  annum. ^ 

Pittsburg,  Pennsylvania,  after  the  construction  of  the  Pennsyl- 
vania Railroad,  wanted  more  rapid  and  more  direct  communication  with 
Pittsburg,  the  West.  It  subscribed  to  the  capital  stock  of  five  railroad 

Pennsylvania  companies  and  issued  in  payment  $1,800,000  city  bonds 
at  6%.  A  few  years  later,  owing  to  general  financial  disasters,  the  rail- 
way stocks  decHned  in  value  and  paid  no  dividends.  The  city,  having 
rehed  on  these  dividends,  failed  to  pay  the  interest  on  its  bonds.  Suit 
was  brought,  judgment  obtained,  and  the  railroad  stocks  levied  on.  The 
city  permitted  the  stocks  to  be  sold  at  a  sacrifice  and  a  large  part  brought 

'  Commercial  atid  Financial  Chronicle,  vol.  25,  p.  114.       *  Ibid.,  vol.  18,  p.  526. 
'  Ibid.,  vol.  27,  p.  678  and  vol.  31,  p.  328.  *  Ibid.,  vol.  28,  p.  121. 

'  Ibid.,  vol.  28,  p.  173.  '  Ibid.,  vol.  32,  p.  70.  ^  Ibid.,  vol.  34,  p.  604. 

'  Ibid.,  vol.  37,  p.  202. 
•  Investors'  Supplement,  Commercial  and  Financial  Chronicle,  July  28,  1888,  p.  10. 


APPENDIX  299 

only  ten  cents  on  a  dollar.  The  city  later  proposed  a  compromise  by 
which  the  6%  bonds  were  exchanged  for  4%  bonds  having  fifty  years  to 
run.  The  greater  part  were  exchanged.  Some  creditors  refused  to  accept 
and  brought  suit  for  interest  on  the  old  bonds.  The  judgments,  amount- 
ing to  over  $500,000,  were  paid  in  currency  in  1871.^ 

Again  in  1877,  the  city  defaulted  in  interest  on  certain  bonds. ^  The 
cause  of  this  default  was  extensive  improvements,  including  newly 
paved  streets.  Bonds  to  pay  for  these  improvements  were  issued  by  the 
city,  but  were  supposed  to  be  paid  out  of  special  assessments.  The  law 
permitting  issue  of  these  special  assessment  bonds  was  declared  illegal 
by  the  Supreme  Court  of  the  State.^  In  March,  1879,  a  new  loan  was 
subscribed  to  pay  the  overdue  interest  on  these  Pittsburg  7  per  cents, 
known  as  the  "Penn  Avenue"  bonds.^ 

St.  Clair  County,  Missouri,  in  1870  issued  bonds  in  aid  of  the 
Tebo  &  Neosho  Railway.  The  proposed  railroad  never  was  built,  and 
the  taxpayers  repudiated  the  bonds.  ^    Holders  of  the   g^  ^-j^j^ 
bonds  resorted  to  the  courts  over  and  over  again  without   County, 
avail.    The  State  Supreme  Court  held  the  county  not      ^^^o"" 
liable.   The  United  States  Circuit  Court,  however,  on  the  theory  that 
the  bondholders  were  innocent  purchasers,  ordered  a  tax  levy  to  pay 
principal  and  interest.  This  amounted,  at  the  time  of  the  decision,  to 
nearly  $900,000,  although  the  issue  of  bonds  was  only  $200,000.^  The 
debt  had  grown  to  be  about  one  third  of  the  assessed  value  of  the  whole 
county.  Members  of  the  County  Court  persistently  refused  to  make  a 
levy.   Several  members  served  jail  terms  for  contempt,  and  one  of  the 
qualifications  for  office  in  the  county  was  a  willingness  to  go  to  jail 
rather  than  be  a  party  to  the  levy.'  All  the  bonds  of  this  county  are  still 
in  litigation.^ 

LATER  PERIOD 

Galveston,  Texas,  defaulted  December  i,  1901,  in  interest  due  on 
limited  debt  bonds  of  1881.^  The  default  was  due  to  the  great  storm  of 
September  8,  1900,  in  which  over  7500  persons  were  lost   Galveston, 
and  fully  as  many  more  left  the  city  to  seek  employment   '^^^^^ 
elsewhere.  "^^  In  the  final  settlement,  there  was  simply  a  reduction  of 

*  Commercial  and  Financial  Chronicle,  vol.  13,  p.  242. 

*  Ibid.,  vol.  24,  p.  519.  '  Ibid.,  vol.  24,  p.  591.  *  Ibid.,  vol.  28,  p.  302. 

*  Ibid.,  vol.  66,  p.  819  and  vol.  89,  p.  1293.  •  Ibid. 
^  Ibid.,  vol.  89,  p.  1293. 

'  State  and  City  Section,  Commercial  and  Financial  Chronicle,  May  30, 1914,  p.  1 24. 
'  Commercial  atid  Financial  Chronicle,  vol.  73,  p.  1275. 

1"  State  and  City  Section,  Commercial  attd  Financial  Chronicle,  May  30,  1914, 
p.  195,  and  Commercial  and  Financial  Chronicle,  vol,  71,  p.  564. 


3CX)  APPENDIX 

interest  from  5%  to  2^%  for  a  period  of  five  years  from  December  i, 
1901.^  This  was  agreed  to  willingly  by  most  of  the  bondholders.^ 

MiDDLESBORO,  KENTUCKY,  was  a  flourishing  town  in  the  early  nineties, 
and  was  the  center  of  what  was  considered  to  be  a  staple  iron  and  steel 
Middiesboro,  manufacturing  district.  An  English  syndicate  was  inter- 
Kentucky  ested  in  developing  the  iron  business  there,  but  after  many 
years  the  quality  of  the  ore  ran  out  and  this  large  English  plant  was 
abandoned.  Later,  other  plants  moved  away,  taking  with  them  a  great 
deal  of  the  population.  The  character  of  the  city  changed  entirely,  and 
it  was  not  long  before  the  new  population  began  to  question  the  debts 
settled  on  it  by  the  old  and  to  demand  a  readjustment.  Interest  was 
defaulted  and  the  matter  taken  to  the  courts  by  bondholders.^  The 
United  States  Circuit  Court  declared  the  debt  valid  and  binding.  An 
agreement  between  a  bondholders'  committee  and  the  city  provided  as 
follows:  From  October  i,  1905,  interest  was  reduced  from  6%  to  4%, 
and  a  lump  sum  of  $28,000  was  agreed  on  for  overdue  interest,  judg- 
ments, etc.,  to  be  paid  in  fourteen  annual  installments  of  $2000  each, 
beginning  on  or  before  December  31,  1907.^ 

^  Commercial  and  Financial  Chronicle,  vol.  74,  p.  1102. 

*  Information  received  from  bankers. 

'  Commercial  and  Financial  Chronicle,  vol.  84,  p.  404. 


REFERENCES  FOR  CERTAIN  COUNTY  AND 
MUNICIPAL  DEFAULTS 

Austin,  Texas. 
State  and  City  Section,  Commercial  and  Financial  Chronicle,  May  30, 

1914,  p.  193. 
Commercial  and  Financial  Chronicle,  vol.  69,  p.  91 ;  vol.  70,  pp.  46  and 
755;  vol.  71,  p.  4S;  vol.  73,  p.  459;  vol.  74,  p.  590- 
Birmingham,  Alabama. 

State  and  City  Supplement,  Commercial  and  Financial  Chronicle, 

April  13,  1901,  p.  171. 
Commercial  and  Financial  Chronicle,  vol.  61,  p.  338. 
Cairo,  Illinois. 

State  and  City  Supplement,  Commercial  and  Financial  Chronicle, 
April  1897,  p.  97. 
Dallas  County,  Missouri. 
State  and  City  Supplement,  Commercial  and  Financial  Chronicle, 

April  29,  1893,  p.  113. 
Commercial  and  Financial  Chronicle,  vol.  69,  p.  1074;  vol.  87,  p.  1039; 
vol.  90,  p.  63;  vol.  94,  p.  1263;  vol.  96,  p.  1241;  vol.  98,  p.  626. 
Elizabeth,  New  Jersey. 
Commercial  and  Financial  Chronicle,  vol.  28,  p.  146;  vol.  29,  pp.  120, 
277,  and  563;  vol.  30,  p.  589;  vol.  32,  pp.  231,  253,  312,  and  368; 
vol.  35,  p.  602;  vol.  37,  p.  342;  vol.  39,  p.  581;  vol.  40,  p.  625;  vol. 
42,  p.  93;  vol.  46,  p.  828;  vol.  47,  p.  50. 
Evansville,  Indiana. 
Commercial  and  Financial  Chronicle,  vol.  41,  pp.  494  and  527;  vol.  43, 
p.  607;  vol.  44,  p.  335;  vol.  45,  P-  "2. 
Fort  Worth,  Texas. 
State  and  City  Section,  Commercial  and  Financial  Chronicle,  May  30, 

1914,  p.  195. 
Commercial  and  Financial  Chronicle,  vol.  66,  p.  775;  vol.  67,  p.  1072; 
vol.  69,  p.  711;  vol.  72,  p.  100;  vol.  76,  p.  223;  vol.  79,  p.  1291. 
Galveston,  Texas. 
State  and  City  Section,  Commercial  and  Financial  Chronicle,  May  30, 

1914,  p.  195. 
Commercial  and  Financial  Chronicle,  vol.  71,  p.  564;  vol.  73,  p.  1275; 
vol.  74,  p.  1 102. 


302  APPENDIX 

Green  County,  Kentucky. 

State  and  City  Section,  Commercial  and  Financial  Chronicle,  May 

190S,  p.  163. 
Commercial  and  Financial  Chronicle,  vol.  77,  p.  48;  vol.  78,  p.  1234; 

vol.  81,  p.  1059;  vol.  84,  p.  949;  vol.  96,  p.  1507. 
Macon  County,  Missouri. 

State  and  City  Section,  Commercial  and  Financial  Chronicle,  Nov.  26, 

1904,  p.  2354. 
State  and  City  Section,  Commercial  and  Financial  Chronicle,  May, 

1908,  p.  124. 
Commercial  and  Financial  Chronicle,  vol.  79,  p.  1352;  vol.  80,  p.  179; 

vol.  92,  p.  1 191;  vol.  93,  p.  548. 
Memphis,  Tennessee. 

Investors'  Supplement,  Commercial  and  Financial  Chronicle,  January 

26,  1878,  p.  10;  July  28,  1888,  p.  10. 
Commercial  and  Financial  Chronicle,  vol.  18,  p.  526;  vol.  25,  p.  114; 

vol.  27,  p.  678;  vol.  28,  pp.  121  and  173;  vol.  31,  p.  328;  vol.  32, 

p.  70;  vol.  34,  p.  604;  vol.  36,  p.  221;  vol.  37,  p.  202;  vol.  38,  p.  509; 

vol.  39,  p.  727. 
Middlesboro,  Kentucky. 

Commercial  and  Financial  Chronicle,  vol.  84,  p.  404. 
Mobile,  Alabama. 

Investors'  Supplement,  Commercial  and  Financial  Chronicle,  February 

26,  1876,  p.  10;  May  31,  1879,  p.  10;  February  25,  1882,  p.  11;  July 

30,  1887,  p.  10. 
Commercial  aftd  Financial  Chronicle,  vol.  16,  p.  661;  vol.  17,  p.  19; 

vol.  21,  p.  302;  vol.  25,  p.  382;  vol.  28,  pp.  224  and  327;  vol.  29, 

P-  374- 
Mt.  Vernon,  Indiana. 

Commercial  atid  Financial  Chronicle,  vol.  29,  p.  383. 
Nebraska  City  {Otoe  County),  Nebraska. 

State  and  City  Section,  Commercial  and  Financial  Chronicle,  May  30, 

1914,  p.  131. 
Commercial  and  Financial  Chronicle,  vol.  72,  p.  302. 
New  Orleans,  Louisiana. 

Commercial  and  Financial  Chronicle,  vol.  27,  pp.  228  and  628;  vol.  28, 
p.  352;  vol.  30,  pp.  466,  494,  and  650;  vol.  31,  pp.  606-07;  vol.  35, 
pp.  50  and  763;  vol.  47,  pp.  50  and  170. 
Pittsburg,  Pennsylvania. 
Commercial  and  Financial  Chronicle,  vol.  13,  p.  242;  vol.  24,  pp.  519 
and  591;  vol.  28,  p.  302. 
St.  Clair  County,  Missouri. 

State  and  City  Section,  Commercial  and  Financial  Chronicle,  May  30, 
1914,  p.  124. 


APPENDIX  303 

Commercial  and  Financial  Chronicle,  vol.  66,  p.  819;  vol.  89,  p.  1293. 
St.  Joseph,  Missouri. 
Commercial  and  Financial  Chronicle,  vol.  23,  pp.  135  and  175;  vol.  25, 
p.  408;  vol.  28,  p.  477;  vol.  32,  p.  659;  vol.  43.  P-  SO- 

Savannah,  Georgia.  .  ,  ^,       •  7    t 

Investors'  Supplement,  Commercial  and  Financial  Chronicle,  January 

26,  1878,  p.  13.  ,  101   .A 

Commercial  and  Financial  Chronicle,  vol.  25,  pp.  41  and  382;  vol.  2O, 

pp.  18  and  625;  vol.  27,  pp.  123,  i73>  and  568. 
Superior,  Wisconsin.  .  ,  ^7       •  7 

State  and  City  Supplement,  Commercial  and  Financial  Chronicle, 

April  10,  1897,  p.  no.  .  ,  ^,       •  7    tvt        o 

State  and  City  Section,  Commercial  and  Financial  Chronicle,  May  28, 

1904,  p.  2149.  , 

Commercial  and  Financial  Chronicle,  vol.  73,  PP-  801  and  11 24;  vol.  74, 
pp.  no  and  590;  vol.  78,  p.  1569;  vol.  79,  PP-  2107  and  2807;  vol. 
93,  P-  301- 


[Copy] 

THE  SUPREME  COURT 

OF  KANSAS 

ToPEKA,  Nov.  7,  1914. 
GooDALE  &  Nash, 
Boston,  Mass, 
Dear  Sirs:  — 

Answering  yours  of  the  3rd  inst.  beg  to  advise  that  the  case  you  refer 
to  was  the  case  of  Levison  vs.  Finney,  No.  18934,  and  was  never  reported 
for  the  reason  that  the  case  never  came  to  a  final  hearing  on  the  matter 
of  levying  tax.  At  the  time  the  application  was  made  for  the  writ,  this 
court  held  that  it  had  jurisdiction  to  require  the  levy  to  be  made  and 
give  the  defendant  time  to  answer  raising  any  question  it  desired  as  to 
the  vaHdity  of  the  indebtedness;  it  also  restrained  the  defendant  from 
making  any  levy  for  the  current  year,  but  did  not  preclude  the  levy  of  a 
tax  for  the  purpose  indicated,  subject  to  change  on  order  of  the  court. 

Yours  truly, 

D.  A.  Valentine, 

Clerk  Supreme  Court. 


RAILROAD   LAWS 

LAWS  FORBIDDING  COMBINATION  AND  CONSOLIDATION 

Massachusetts:  Acts,  1907,  chap.  585. 

Minnesota:  General  Laws,  1907,  chap.  395. 

Oklahoma:  Constitution  of  Oklahoma,  adopted  1907,  art.  ix,  sees.  8,  9. 

Pennsylvania:  Laws  of  Pennsylvania,  1907,  nos.  254  and  281. 

Utah:  Laws  of  Utah,  1907,  chap.  93,  sec.  6. 

LAWS  ORDERING  CHANGES  IN  CONSTRUCTION  OF  ROAD  OR 
ROLLING-STOCK 

Illinois:  Laws  of  Illinois,  1907,  p.  476  (safety  appliances). 
Indiana:  Acts,  1907,  chap.  205  (block  signals). 

Acts,  1907,  chap.  118  (safety  appliances). 
Kansas:  Laws  of  Kansas,  1905,  chap.  346;  ihid.,  1907,  chap.  277. 
Michigan:  Public  Acts,  1907,  chap.  312,  sees.  13,  34  and  35;  ibid.,  chap. 

234  (automatic  couplers). 
Minnesota:  General  Laws,  1905,  chaps,  208,  280. 

General  Laws,  1907,  chaps.  54,  202,  276,  333,  396. 
Missouri:  Laws  of  Missouri,  1905,  pp.  100,  106,  107. 

Laws  of  Missouri,  1907,  pp.  181,  182  (safety  appliances). 
Montana:  Laws  of  Montana,   1905,  chap.   29;  ibid.,  1907,  chap.  59 
(cattle-guards  and  fences). 
Laws  of  Montana,  1907,  chap.  54  (size  of  cabooses). 
New  York:  Laws  of  New  York,  1907,  chap.  208,  p.  403  (steam-cocks, 

etc.,  on  locomotives). 
North  Dakota:  Laws  of  North  Dakota,  1907,  chaps.  209,  210,  211. 
Ohio:  Laws  of  Ohio,  1906,  p.  342,  act  approved  April  16,  1906,  sec.  9; 

ibid.,  pp.  46,  75. 
South  Carolina:  Acts,  1906,  no.  2. 
South  Dakota:  Session  Laws,  1907,  chap.  212. 
Texas:  Laws  of  Texas,  1905,  chaps.  56  and  133. 
Laws  of  Texas,  1907,  chaps.  32  and  155. 
Virginia:  Acts  of  Assembly,  1906,  chaps.  298  and  302. 
Vermont:  Laws  of  Vermont,  1906,  no.  118,  sees.  18  and  27;  nos.  119  and 

120. 
Washington:  Laws  of  Washington,  1905,  chap.  164,  sec.  10  (spark- 
arresters).  .' 


306  APPENDIX 

Washington:  Laws  of  Washington,  1907,  chap.  138,  and   chap.    226, 

sees.  13-14  (safety  appliances). 
Wisconsin:  Laws  of  Wisconsin,  1905,  chap.  264,  sec.  17,  chap.  348. 
Laws  of  Wisconsin,  1907,  chap.  595. 

LAWS   SHORTENING  HOURS  OF   LABOR 

Connecticut:  PubHc  Acts,  1907,  chap.  242. 
Indiana:  Acts,  1905,  chap.  169,  sec.  674. 

Acts,  1907,  chap.  131. 
Iowa:  Laws  of  Iowa,  1907,  chap.  163. 
Kansas:  Laws  of  Kansas,  1905,  chap.  342. 

Laws  of  Kansas,  1907,  chap.  280. 
Minnesota:  General  Laws,  1907,  chap.  253. 
Missouri:  Act  approved  March  25,  1905. 
Laws  of  Missouri,  1905,  p.  112. 
Montana:  Laws  of  Montana,  1907,  chap.  5. 
New  York:  Laws  of  New  York,  1907,  chaps.  523  and  627. 
Nevada:  Statutes,  1907,  chap.  186. 
North  Carolina:  Public  Laws,  1907,  chap.  456. 
North  Dakota:  Laws  of  North  Dakota,  1907,  chap.  207. 
Oregon:  General  Laws,  1905,  chap.  143. 
South  Dakota:  Session  Laws,  1907,  chap.  220. 
Texas:  General  Laws,  1907,  chap.  51. 
Washington:  Laws  of  Washington,  1907,  chap.  20. 
West  Virginia:  Acts,  1907,  chap.  59. 
Wisconsin:  Laws  of  Wisconsin,  1907,  chaps.  575  and  655. 

LAWS    HELD   UNCONSTITUTIONAL 

Among  railroad  regulative  laws  that  have  been  held  to  be  unconsti- 
tutional, the  following  may  be  mentioned:  — 

Laws  of  Wisconsin,  1907,  chap.  266,  p.  402:  providing  that  an  upper 
berth  in  a  sleeping-car  shall,  when  unoccupied,  be  closed  at  the  option 
of  the  occupant  of  the  lower  berth.  State  v.  Redmon,  134  Wis.  89,  114 
N.W.  137. 
Laws  of  Alabama,  1907,  p.  711:  fixing  maximum  freight  and  passenger 
rates  on  business  within  the  State,  and  providing  that  on  violation  the 
railroad  company  and  its  agents  should  be  liable  respectively  to  pen- 
alty and  to  criminal  prosecution,  so  that  a  railroad  could  not  test  the 
validity  of  the  statute  without  risk  of  bankruptcy.  Central  of  Georgia 
Railway  Co.  et  al  v.  Railroad  Commission  of  Alabama,  161  Fed.  Rep. 

925- 
Laws  of  North  Dakota,  1907,  chap.  199,  p.  327:  providing  for  a  maximum 


APPENDIX  307 

passenger  rate  of  two  and  one  haK  cents  per  mile  and  further  providing 
for  mileage  books  at  two  cents  per  mile,  good  for  purchaser  and  such 
adult  members  of  his  family  as  he  may  designate.  This  latter  provi- 
sion was  held  invahd  as  being  discriminatory.  State  v.  Great  Northern 
Railway  Company,  17  N.D.  370,  116  N.W.  89. 

Laws  (Washington),  1905,  p.  238,  sec.  2:  arbitrarily  fixing  the  weight  of 
standards  for  lumber  cars  at  one  thousand  pounds,  and  requiring  such 
weight  to  be  deducted  from  the  net  weight  of  the  lumber  on  all  car- 
loads received  for  shipment,  regardless  of  the  actual  weight  of  such 
standards.  State  v.  Great  Northern  Railway  Company,  43  Wash.  658, 
86  Pac.  1056. 

Acts  of  Assembly  (Virginia),  1906,  chap.  256:  fixing  a  maximum  rate  for 
mileage  books  not  applicable  to  passenger  fares  generally.  Common- 
wealth V.  Atlantic  Coast  Line  Railway  Company,  106  Va.  61,  55  S.E. 

572. 

Session  Laws  (Nebraska),  1905,  chap.  105,  sees,  i  and  6:  requiring  rail- 
road to  build  switches  at  request  of  owner  of  elevator  and  providing 
no  compensation.  Missouri  Pacific  Railway  Company  v.  Nebraska, 
217  U.S.  196. 

Laws  (Illinois),  1907,  p.  746:  fixing  maximum  passenger  fares  so  low  as 
to  involve  confiscation.  Trust  Company  of  America  v.  Chicago  Pacific 
and  St.  Louis  Railway  Company,  199  Fed.  Rep.  593. 

Acts  (West  Virginia),  1907,  chap.  41:  fixing  maximum  passenger  fares  so 
low  as  to  be  confiscatory.  Coal  and  Coke  Railway  Company  v.  Conley 
et  al,  67  W.Va.  129,  67  S.E.  613. 

The  above  are  merely  typical  examples  and  by  no  means  a  complete 
list  of  such  cases. 


3o8 


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INDEX 


Accounts,  supervision  of  public-service 
corporation,  by  state  commissions,  232. 

Alabama,  debt  history  of,  122-124. 

American  investments  in  foreign  coimtries, 
70-71. 

American  securities  held  abroad,  69-70. 

Anglo-French  dollar  loan,  88-91. 

Argentine  Republic,  special  security  for 
certain  bonds  of,  5. 

Arkansas,  debt  history  of,  109-110. 

Assessed  valuation:  for  all  States,  191 2- 
1913,  98,  99;  percentage  of  debt  to  as- 
sessed valuation  for  all  the  States,  98, 
99;  relation  between  true  value  of  prop- 
erty and,  98;  of  counties  and  incor- 
porated places,  141. 

Assessments:  in  railroad  reorganizations, 
186, 188-191 ;  in  pubUc-service  reorgani- 
zations, 246-248;  in  industrial  reorgani- 
zations, 290-291. 

Assets  offsetting  national  debts,  17-19. 

Atchison,  Kansas,  attempted  bad  faith  by, 

155,  304- 

Atchison,  Topeka  &  Santa  F6  Railroad 
Company:  causes  of  failure  of,  167; 
summary  of  reorganization  of,  187; 
foreclosure  price  compared  with  debt 
of,  187;  what  security-holders  received 
in  reorganization  of,  188;  market  value 
of  new  securities  received  in  reorganiza- 
tion of,  193. 

Austria-Hungary:  price  of  Austrian  and 
Himgarian  bonds  19 13,  7;  racial  origin 
of,  9;  outline  of  history  of ,  13;  popula- 
tion, wealth  and  debt  of,  15-17;  assets 
offsetting  national  debt  of,  18;  national 
debt  charge  compared  with  national  in- 
come, 20;  national  debt  charge  com- 
pared with  total  government  expendi- 
ture, 21;  growth  in  population  of,  22,  23; 
growth  in  wealth  of,  24-25;  increase  in 
debt  of,  27,  29;  debt  history  of,  39-40; 
form  of  government  in,  62;  character  of 
population  of,  63;  military  position  of, 
64;  economic  position  of,  65;  foreign 


commerce  of,  67,  68;  position  of,  among 
nations,  73;  prices  of  Austrian  rentes, 
77;  cost  of  present  war  to,  76,  78;  total 
losses  of  present  war  to,  up  to  July  31, 
1915,  79;  war  loans  put  out  since  begin- 
ning of  present  war  up  to  October  23, 
1915,  82,  83;  war  prices  of  government 
bonds,  91,  92;  state-operated  railways 
in,  176. 

Bad  faith,  cases  of,  155;  attempt  at,  by 
Atchison,  Kansas,  155,  304. 

Baltimore  &  Ohio  Railroad  Company: 
causes  of  failure  of,  167;  summary  of 
reorganization  of,  187;  what  security- 
holders received  in  reorganization  of, 
191;  market  value  of  new  securities  re- 
ceived in  reorganization  of,  193. 

Banking  business,  Lx,  65,  68. 

Banking  commissions,  68. 

Bolivia,  government  loans  in  default,  59, 

Bond  business  in  the  United  States,  x. 

Bond  investment,  framework  of,  3. 

Bonding,  of  industrial  concerns,  257. 

Bonds:  investment  in,  a  modem  develop- 
ment, ix;  as  a  channel  of  investment,  i; 
what  they  represent,  3 ;  principal  classes 
of  investment,  3;  the  two  great  markets 
for,  3;  framework  of  bond  investment,  3; 
safety  of,  3-4;  United  States  and  for- 
eign government,  5-93;  state,  94-139; 
county,  municipal,  and  district,  140- 
161;  special  assessment,  140;  steam- 
railroad,  162-197;  public-service  cor- 
poration, 198-250;  industrial,  251-294; 
municipal  refunding,  150;  first  mort- 
gage, 162;  consolidated  mortgage,  162; 
general  mortgage,  162;  debenture,  162; 
plain,  162;  income,  162;  convertible, 
162;  equipment,  162-163;  collateral 
trust,  162-163;  terminal,  163;  guaran- 
teed, 163. 

Boston  Sliding  Scale  Act,  206. 

Bulgaria,  special  security  for  certain 
bonds  of,  5-6. 


312 


INDEX 


California:  debt  history  of,  112-113;  fa- 
vorable factors  affecting  credit  of,  137; 
joint  use  of  facilities  by  public-service 
corporations  in,  216;  California  Com- 
mission on  determining  fair  value  as  a 
basis  for  rates,  221;  local  regulation  of 
public-service  corporations  in,  233. 

Capitalization :  of  American  and  European 
railways  compared,  194;  gross  and  net, 
of  all  railroads,  197;  regulation  of  pub- 
lic-service, by  state  commissions,  230- 
232;  total,  in  industrial  and  railroad 
reorganizations,  289-290. 

Certificates  of  public  convenience  and  ne- 
cessity, of  public-service  corporations, 
209,  212-213;  conditions  regulating  is- 
suance of,  213. 

Certification:  of  state  bonds,  131;  of 
county,  municipal,  and  district  bonds, 
157-158. 

Chicago  City  Railway  Company,  fran- 
chise of,  206. 

Chicago  Railways  Company,  franchise  of, 
206. 

Chicago  Union  Traction  Company,  re- 
organization of ,  241,  243,  244,  246,  248. 

Circuit  Court  of  Appeals:  jurisdiction  of, 
in  enforcement  of  Clayton  Act,  272; 
appeal  from  Federal  Trade  Commission 
to,  273. 

Civilization,  changes  in  leadership  of,  9- 
10. 

Clayton  Anti-Trust  Law:  enactment  of 
the,  267;  leading  provisions  of  the,  268- 
269;  amplifies  and  supplements  the 
Sherman  Anti-Trust  Law,  269-270;  in 
regard  to  exports,  270;  holding  com- 
panies, 270;  interlocking  directorates, 
271;  personal-guilt  clause  in  the,  271; 
machinery  of  enforcement  of  the,  271- 
272;  summary  of  the,  272. 

Cleveland  Railway  Company,  franchise 
of,  206-207. 

Colombia,  government  loans  in  default, 

59- 
Combination:  forms  of,  258-259;  econom- 
ic advantages  of,  259-260;  disadvan- 
tages of,  260-261;  successful  and  un- 
successful large-scale  operation,  261; 
distinction  between  advantages  and 
disadvantages  of ,  and  monopoly  control, 
261;  motives  for,  262;  advantages  of 
corporate  form  of,  262. 


Commission  form  of  government,  157. 

Commissions:  regulation  by  state,  of 
pubUc-service  corporations,  207-233; 
modem  public-service,  208,  209,  210- 
212;  present  state,  having  jurisdiction 
over  street-railway,  gas,  electric-light 
and  power  or  telephone  companies,  209, 
210-212;  leading  principles  of  regula- 
tion of  public-service  corporations  by 
state,  209,  212-232;  authority  of,  over 
rates  of  public-service  corporations, 2 18; 
authority  of,  to  approve  or  disapprove 
issue  of  public-service  securities,  230- 
232 ;  judicial  review  of  ^decisions  by  state 
commissions,  232-233. 

Competition:  railroad,  164-165,  166,  256; 
public-service  corporation,  256;  govern- 
ing factor  in  existence  of  industrial  con- 
cerns, 256;  saving  of  the  wastes  of,  260; 
monopoly  control  and,  267;  potential 
and  effective,  267;  unfair  methods  of, 
272-273,  275-276;  three  sources  of  pos- 
sible, in  failure  of  industrial  concerns, 
286. 

Consolidated  mortgage  bonds,  162. 

Consolidations:  attitude  of  state  com- 
missions toward  public-service  corpora- 
tion, 213-214;  basis  on  which,  are  per- 
mitted in  various  States,  214;  purposes 
of  industrial  promotions  and,  284. 

Constitutional  limitations  in  regard  to 
creation  and  payment  of  state  debt, 
129-131;  of  local  debt,  143-152. 

Convertible  bonds,  162. 

Corporations:  various  classes  of  public- 
service,  198;  origin  and  development  of 
business  done  by  pubUc-service,  199- 
202;  points  of  similarity  in  different 
classes  of  public-service,  202;  rate  of 
return  on  capital  invested  in  public- 
service,  219;  broad  relation  of  public- 
service,  to  the  people,  238-239;  develop- 
ment of,  as  a  means  of  carrying  on 
business,  251-252;  fluctuating  nature  of 
business  done  by  industrial,  252;  net 
earnings  of  some  leading  industrial,  252- 
255;  competitive  nature  of  business 
done  by  industrial,  256;  importance  of 
good  management  of  industrial,  256- 
257;  question  as  to  whether  competitive 
industrial,  should  be  bonded,  257;  con- 
ditions which  may  furnish  proper  basis 
for  bonding  of  industrial,  257-258;  ad- 


INDEX 


313 


vantages  to  industrial  concerns  in  com- 
bining in  form  of,  262;  subject  to  pub- 
lic control,  262;  suggestion  of  federal 
incorporation  of  industrial,  283-284; 
causes  of  failure  in  special  cases  of  in- 
dustrial, 287-288 ;  care  taken  in  bonding 
of  industrial,  286-289. 
Costa  Rica,  government  loans  in  default, 

59- 

Cost  of  service  as  a  basis  for  rates,  218- 
219. 

Cost  of  war:  to  leading  nations  involved, 
76-77,  78-81;  comparison  of  present, 
with  that  of  previous  wars,  80. 

County  bonds:  definition  of,  140;  means  of 
recovery  on  defaulted,  140;  factors  gov- 
erning safety  of ,  140-141, 152-153, 157; 
laws  in  regard  to  issue  of,  in  Massachu- 
setts, 143-146;  comparison  of  Massachu- 
setts laws  with  those  of  other  States  in 
regard  to  issue  of,  146-152;  purposes  of 
issue  of,  148-150;  issue  of,  for  improper 
or  unwise  purposes,  149-150;  length  of 
time  which  bonds  may  run,  150-15 1; 
vote  of  people  to  authorize,  151;  pay- 
ment of,  by  sinking-fund  or  serial  meth- 
od, 151 ;  amount  and  character  of  popu- 
lation important  factors  in  safety  of, 
152-153;  record  of,  153-157,  297-303; 
causes  of  default  in,  154-155,  297-303; 
settlements  made  with  bondholders  on 
defaulted,  155-156,  297-303;  legality  of 
issue  and  certification  as  to  genuineness, 
157-158;  safety  of,  161. 

Credit :  of  nations  shown  by  prices  of  their 
bonds,  7,  8;  bearing  of  historical  devel- 
opment on,  15;  certain  factors  deter- 
mining national,  15,  58,  63-71;  normal 
conditions  vs.  the  war,  15;  most  impor- 
tant factor  in  estimating  national,  58; 
considerations  in  estimating  state,  94- 
95,  132-137;  summary  of  factors  bear- 
ing on  state,  137. 

Creditor  nations,  65-70. 

Debenture  bonds:  definition,  162;  reme- 
dies for  non-payment  of,  163. 

Debt:  of  leading  civilized  nations,  15-17; 
percentage  of  national,  to  resources,  16; 
assets  offsetting  national,  17-19;  bur- 
den of  national,  19;  comparison  of  na- 
tional debt  charge  with  national  income, 
19,  20;  comparison  of  national  debt 


charge  with  total  government  expendi- 
ture, 19,  21;  increases  in  national,  26-29; 
changes  in  national,  charges,  29-30; 
debt  histories  of  leading  nations,  30-57; 
summary  of  national,  histories,  57-58; 
war,  81-84;  debt  statements  of  various 
States,  95-97;  percentage  of  net,  to  as- 
sessed valuation  for  all  the  States,  98, 
99;  changes  in  total  of  state,  1790-19 13, 
98-100,  loi;  reason  for  comparative 
freedom  of  our  States  from,  100;  impor- 
tance of  state  history  of,  100;  debt  his- 
tories of  all  defaulting  States,  100-128; 
summary  of  state  debt  histories,  12  8- 
129;  provisions  for  debt-making  in  state 
constitutions,  1 29-131;  proportion  of 
net,  to  assessed  valuation,  141;  of  coun- 
ties and  incorporated  places,  141 ;  of  ten 
largest  cities  in  the  United  States,  141- 
142;  quasi-municipal  debt-creating  cor- 
porations, 142-143;  burden  of,  on  local 
communities,  142-143;  constitutional 
and  statutory  provisions  in  regard  to 
local,  143-152;  comparison  of  Massa- 
chusetts laws  with  those  of  other  States 
in  regard  to  local,  146-152;  position  of 
the  legislature  in  regard  to  local,  146- 
147;  limitations  on  local,  147-148;  ex- 
ceptions in  regard  to  creation  of  local, 
147-148;  limiting  and  removing  tax 
limit,  148;  methods  of  paying  local,  151; 
increase  in  local,  1890,  1892,  and  1913, 
158-159;  local,  1913, 159;  local,  in  Great 
Britain,  France,  and  Germany,  159; 
proportions  between  local,  state,  and 
national,  159;  relation  of,  to  assets  of 
steam  railroads,  163;  ratio  of,  to  assets 
of  public-service  corporations,  203; 
amount  of  plant  and  of  quick  assets  of 
industrial  concerns  compared  with,  258. 

Debt  charges:  comparison  with  national 
incomes,  19-20;  comparison  with  total 
government  expenditures,  19,  21; 
changes  in,  29-30. 

Debt  history:  of  leading  nations,  30-57; 
of  France,  30-33;  Great  Britain,  34-39; 
Austria-Hungary,  39-40;  United  States, 
41-49;  Russia,  49-51;  Italy,  51-52; 
Germany,  52-55;  Japan,  55-57;  sum- 
mary of  national,  57-58;  government 
loans  in  default,  58,  59;  importance  of 
state,  100;  of  all  defaulting  States,  ick>- 
128;  of  Pennsylvania,  103;  Maryland, 


314 


INDEX 


103-104;  Indiana,  104-105;  IlHnois, 
105-106;  Michigan,  106-107;  Florida, 
107-108;  Mississippi,  108-109;  Arkan- 
sas, 109-110;  Minnesota,  iio-iii; 
Texas,  111-112;  California,  112-113; 
Virginia,  114-117;  West  Virginia,  117- 
118;  North  Carolina,  118-119;  South 
Carolina,  119-121;  Georgia,  1 21-122; 
Alabama,  122-124;  Tennessee,  124-125; 
Louisiana,  125-127;  Missouri,  127-128; 
of  New  York,  i28;Ohio,  i28;Massachu- 
setts,  128;  summary  of  state,  128-129. 

Debtor  nations,  65-70. 

Default:  collection  of  government  bonds 
in,  6;  nations  in  default  in  1874,  57; 
loans  of  independent  governments  in, 
between  1877  and  1912,  58,  59;  collec- 
tion of  state  bonds  in,  94;  three  periods 
of,  of  state  bonds,  100-129;  first  period 
of,  of  state  bonds,  100,  102-110;  second 
period  of,  of  state  bonds,  100,  110-113; 
third  period  of,  of  state  bonds,  loo-ioi ; 
1 13-128;  means  of  recovery  on  county, 
municipal,  and  district  bonds  in,  140; 
causes  of,  in  county,  municipal,  and  dis- 
trict bonds,  154-155;  settlements  made 
with  bondholders  on  defaulted  county, 
municipal,  and  district  bonds,  155-156, 
297-303;  remedies  for  collection  of  rail- 
road bonds  in,  163;  railroad  bonds  in, 
165. 

Depreciation:  general  rule  for  treatment 
of,  in  estimating  fair  value,  224-225; 
treatment  of,  under  various  circum- 
stances, 225;  summary  of,  question, 
225-226;  United  States  Supreme  Court 
on,  226. 

District  bonds:  definition,  140;  means  of 
recovery  on  defaulted,  140;  factors  gov- 
erning safety  of ,  140-141,  152-153,  157; 
laws  in  regard  to  issue  of,  in  Massa- 
chusetts, 143-146;  comparison  of  Massa- 
chusetts laws  with  those  of  other  States 
in  regard  to  issue  of,  146-152;  purposes 
of  issue  of,  148-150;  issue  of,  for  im- 
proper or  unwise  purposes,  149-150; 
length  of  time  which  bonds  may  run, 
150-151;  vote  of  people  to  authorize, 
151;  payment  of,  by  sinking-fund  or 
serial  method,  151;  amount  and  char- 
acter of  population  important  factors  in 
safety  of,  152-153;  record  of,  153-157; 
causes  of  default  in,  154-155;  settle- 


ments made  with  bondholders  on  de- 
faulted, 155-156;  legality  of  issue  and 
certification  as  to  genuineness,  157-158; 
safety  of,  161. 

District  Courts,  jurisdiction  of,  in  enforce- 
ment of  the  Federal  Trade  Commission 
Law,  275. 

Domestic  commerce  of  the  United  States, 
66. 

Earnings:  railroad,  169-170,239;  stability 
of  gross,  of  public-ser\-ice  corporations, 
239;  net,  of  public-service  corporations, 
240;  net,  of  industrial  concerns,  252- 
256,  308-309. 

Economic  position,  of  nations,  64-65. 

Ecuador,  government  loans  in  default,  59. 

Electric  light  and  power,  origin  and  devel- 
opment of,  industry,  200-201. 

Electric  railways,  origin  and  development 
of,  199-200. 

Elizabeth,  New  Jersey,  default  by,  154, 
156,  297,  301. 

England,  early  government  borrowing  in, 
ix-x;  development  of,  10.  See  Great 
Britain. 

Equipment  bonds,  162-163. 

Expenditure:  debt  charge  compared  with 
government,  19,  21;  government,  ne- 
cessity for  reduced,  after  the  war,  85-86. 

Failures:  of  railroads,  165-168;  of  public- 
service  corporations,  240-248;  of  indus- 
trial concerns,  285-288. 

Fair  value  of  property,  219,  220,  222. 

Federal  licensing  or  incorporation  of  rail- 
roads, 172-173;  of  industrial  corpora- 
tions, 283-284. 

Federal  Trade  Commission:  make-up  of, 
272;  power  of,  to  prevent  unfair  methods 
of  competition,  272-273;  appeal  to  de- 
cision of  Circuit  Court  of  Appeals  from, 
273;  other  powers  and  duties  of  the, 
273-275;  comparison  of,  with  Inter- 
state Commerce  Commission,  276-277; 
comparison  of  certain  functions  of, 
with  the  action  of  a  master  in  chancery, 
277;  general  powers  and  functions  of 
the,  277-278;  relation  between  the,  and 
the  Department  of  Justice,  278;  pub- 
licity features,  278-279;  policy  of  the, 
as  outlined  by  Chairman  Davies,  279;  in 
a  position  to  do  constructive  work,  279- 


INDEX 


315 


280;  precedents  and  analogies  for  the, 
280;  new  Federal  Trade  Commission 
Law  substitutes  regulation  by,  for  regu- 
lation by  lawsuit,  280. 

Federal  Trade  Commission  Law:  enact- 
ment of  the,  267-268,  272;  leading  pro- 
visions of  the,  272-275;  publicity 
features  of  the,  278-279;  criticisms  of 
the,  281-282. 

Financial  stability  depends  on  the  people, 
132,  139,  153. 

First -mortgage  bonds:  definition  of,  162; 
remedies  for  non-payment  of,  163. 

Fixed  charges:  in  railroad  reorganizations, 
186;  in  public-service  reorganizations, 
247-248;  in  industrial  reorganizations, 
290. 

Florida,  debt  history  of,  107-108. 

Foreclosure  price,  in  railroad  reorganiza- 
tions, 187,  192;  relation  between,  and 
value  of  railroad  property,  187,  192;  in 
public-service  reorganizations,  241,  243, 
246;  in  industrial  reorganizations,  290. 

Foreign  commerce  of  leading  nations,  66- 
68. 

Foreign  or  colonial  investments:  of  Great 
Britain,  65,  68-69,  70,  88-89,  9°;  of 
France,  65,  70,  72,  88-89,  9°;  of  Ger- 
many, 70;  of  the  United  States,  70-71. 

Foreign  remittances,  68,  69. 

France:  early  government  borrowing  in, 
ix;  early  local  loans  in,  x;  government 
bonds  of ,  5 ;  prices  of  French  rentes,  1 9 1 3 , 
7;  racial  origin  of,  9;  outline  of  history 
of,  lo-ii;  population,  wealth,  and  debt 
of,  15-17;  assets  offsetting  national  debt 
of,  18;  national  debt  charge  compared 
with  national  income,  19,  20;  national 
debt  charge  compared  with  total  gov- 
ernment expenditure,  19,  21;  growth 
in  population  of,  21,  22,  23;  growth  in 
wealth  of,  24,  25,  26;  increase  in  national 
income  of,  26;  increase  in  debt  of,  27, 29; 
debt  history  of,  30-33 ;  form  of  govern- 
ment in,  60;  character  of  population  of, 
63;  military  position  of,  64;  economic 
position  of,  65;  foreign  commerce  of,  67, 
68;  foreign  investments  of,  65,  70,  72, 
88-89,  90;  position  of,  among  nations, 
72;  prices  of  French  rentes,  74,  75,  76, 
77;  cost  of  present  war  to,  76,  78;  total 
losses  of  present  war  to  July  31,  191 5, 
79;  war  loans  put  out  since  beginning  of 


present  war  up  to  October  23,  1915,  82, 
83;  war  prices  of  French  bonds,  91-92; 
Anglo-French  dollar  loan,  88-91;  state 
operated  railways  in,  174,  176;  regula- 
tion of  railways  in,  177-178. 

Franchises:  description  of  public-service 
corporation,  204;  burdensome  restric- 
tions in  public-service  corporation,  204- 
205;  length  of  public-service  corpora- 
tion, 205;  revocable  licenses  or  indeter- 
minate permits,  205;  consent  of  local 
authorities  to  installation  of  property, 
205;  difficulties  in  bringing  about  solu- 
tion of  franchise  question,  205 ;  best  kind 
of,  205-206;  of  Chicago  City  Railways 
and  Chicago  Railways,  206;  of  Cleve- 
land Railway,  206-207;  interesting 
franchise  arrangements,  206-207;  pub- 
lic-service corporation,  said  to  exist  to 
enable  bankers  to  sell  bonds,  212;  fran- 
chise value,  228-229. 

Freights,  68,  69,  70. 

Funds:  investment  of,  difficult,  i;  when 
they  should  be  invested,  i.  See  Sinking 
funds. 

Galveston,  Texas,  default  by,  155,  299- 
300,  301. 

Gas  industry,  origin  and  development  of, 
199,  200. 

General  mortgage  bonds:  definition  of, 
162;  remedies  for  non-payment  of,  163. 

Georgia,  debt  history  of,  1 21-122. 

Germany:  government  bonds  of,  5;  prices 
of  German  bonds,  1913,  7;  racial  origin 
of,  9;  outline  of  history  of,  11-12;  pop- 
ulation, wealth,  and  debt  of,  15-17; 
assets  offsetting  national  debt  of,  17- 
18;  national  debt  charge  compared  with 
national  income,  20;  national  debt 
charge  compared  with  total  govern- 
ment expenditure,  21;  growth  in  popu- 
lation of,  22,  23;  growth  in  wealth  of, 
24,  25,  26;  increase  in  national  income 
of,  26;  increase  in  debt  of,  27,  29;  debt 
history  of,  52-55;  form  of  government 
in,  61-62;  character  of  population  of, 
63;  military  position  of,  64,  72;  eco- 
nomic position  of,  65 ;  foreign  commerce 
of,  67,  68;  foreign  investments  of,  70; 
position  of,  among  nations,  72-73; 
prices  of  Prussian  consols,  1880-1912, 
77;  cost  of  present  war  to,  76,  78,  79; 


3i6 


INDEX 


total  losses  of  present  war  up  to  July  3 1 , 
1915,  79;  war  loans  put  out  since  be- 
ginning of  present  war  up  to  October 
23,  1915,  82,  83;  war  prices  of  German 
bonds,  91,  92;  state-operated  railways 
in,  174,  175-176;  municipal  ownership 
and  operation  of  public  utilities  in,  235, 
236. 

Going  concern  value,  227-228. 

Government:  early,  loans,  ix;  early,  bor- 
rowing in  France,  England,  and  the 
United  States,  ix-x;  forms  of,  of  leading 
nations,  58,  60-63;  commission  form  of, 
157- 

Government  bonds:  description  of,  5;  how 
payable,  5;  of  United  States,  Great 
Britain,  France,  and  Germany,  5;  spe- 
cial security  for  some,  5-6;  no  method  of 
collecting  defaulted,  6;  can  be  issued  for 
any  purpose,  6;  prices  of,  1913,  7;  in  de- 
fault, 58,  59;  prices  of  British  consols 
and  French  rentes,  74-75;  prices  of  lead- 
ing, 1873-1912,  74,  76,  77;  proper  at- 
titude of  American  investors  toward 
foreign,  87-88;  war  prices  of,  91-93; 
summary  of  factors  entering  into  values 
and  prices  of,  93. 

Government  ownership  of  railroads:  173- 
176;  two  forms  of,  173;  extent  of,  174; 
arguments  in  favor  of,  174-175;  argu- 
ments against,  175;  results  of,  175-176. 

Great  Britain  and  Ireland:  government 
bonds  of,  5;  price  of  British  consols, 
1913,  7;  racial  origin  of,  9;  development 
of,  10;  population,  wealth,  and  debt  of, 
15-17;  assets  offsetting  national  debt 
of,  17;  national  debt  charge  compared 
with  national  income,  20;  national  debt 
charge  compared  with  total  government 
expenditure,  21;  growth  in  population 
of,  20-21,  22,  23;  growth  in  wealth  of, 
23,  25,  26;  increase  in  national  income 
of,  26;  increase  in  debt  of,  27,  29;  debt 
history  of,  34-39;  form  of  government 
in,  60;  character  of  population  of,  63; 
mihtary  position  of,  64;  economic  posi- 
tion of,  65;  foreign  commerce  of,  67,  68; 
colonial  and  foreign  investments  of, 
65,  68-69,  70,  88-89,  90J  position  of, 
among  nations,  72;  prices  of  British  con- 
sols, 74,  75,  76,  77;  cost  of  present  war 
to,  76,  78;  total  losses  of  present  war  up 
to  July  31,  1915,  79;  war  loans  put  out 


since  beginning  of  war  up  to  October  23, 
1915, 81-82;  war  prices  of  British  bonds, 
91,  92;  Anglo-French  dollar  loan,  88- 
91;  regulation  of  railways  in,  177;  muni- 
cipal ownership  and  operation  of  public 
utiUties  in,  235,  236. 
Greece:  special  security  for  certain  bonds 
of,  6;  government  loans  in  default,  1877, 

59. 
Gross  earnings:  of  railroads,  165,  239;  of 

public-service  corporations,  239. 
Guatemala,  goverrmient  loans  in  default, 

59- 

Historical  development:  United  States, 
10;  Great  Britain,  10;  France,  lo-ii; 
Germany,  11-12;  Italy,  12-13;  Austria- 
Hungary,  13;  Russia,  13-14;  Japan,  14- 
15;  bearing  of,  on  credit,  15. 

Holding  companies:  public  service,  198; 
industrial,  268-269,  270. 

Honduras,  government  loans  in  default, 

59- 
Hudson  River  Electric  Power  Company, 

reorganization  of,  243,  245-246,  248. 
Hungary.  See  Austria-Himgary. 

Illinois,  debt  history  of,  105-106;  favor- 
able factors  affecting  credit  of,  137. 

Income:  national,  19,  20,  26;  of  railroads, 
170. 

Income  bonds,  162. 

Incorporation,  federal:  of  railroads,  172- 
173;  of  industrial  concerns,  283-284. 

Indiana:  debt  history  of,  104-105;  fran- 
chises in,  205. 

Industrial  bonds:  definition  of,  251;  de- 
velopment of  the  issue  of,  251-252; 
most  important  factor  in  safety  of,  256- 
257;  should  be  issued  in  serial  form  or 
have  sinking  fund,  258;  necessary  to 
consider  each  issue  of,  292;  examples  of 
strong,  292-293;  prices  of  leading,  1914, 
293-294;  effect  of  European  war  on, 294; 
care  required  in  selection  of,  for  invest- 
ment, 294. 

Industrial  concerns:  origin  and  develop- 
ment of,  251-252;  fluctuating  nature  of 
business  done  by,  252;  net  earnings  of 
some  leading,  252-256,  308-309;  com- 
petitive nature  of  business  done  by,  256; 
importance  of  good  management  of, 
256-257;  question  as  to  whether  com- 


INDEX 


Z^^l 


petitive,  should  be  bonded,  257;  condi- 
tions which  may  furnish  proper  basis 
for  bonding  of,  257;  plant  and  quick 
assets  compared  with  debt  of,  258;  rela- 
tion of  great,  to  the  public,  258;  com- 
bination of,  258-259;  origin  of  the 
"trust"  question,  259;  large-scale  opera- 
tion and  monopoly  control  by,  261,  284- 
285;  Sherman  Anti-Trust  Law,  262- 
267;  Clayton  Anti-Trust  Law,  267-272; 
suggestion  of  federal  incorporation  of, 
283-284;  failure  of  earnings  to  meet  esti- 
mates, 285 ;  various  degrees  of  failure  of, 
285 ;  leading  business  causes  of  failure  of, 
285;  proportion  between  tangible  assets 
and  total  capitalization,  285;  sources  of 
possible  competition,  286;  direct  cause 
of  failure  of  many,  286;  causes  of  failure 
of  certain  large,  286,  287-288;  bonding 
of,  286-289;  general  conditions  neces- 
sary to  success  of,  289;  reorganizations 
of,  289-292;  total  capitalization  in  re- 
organizations of,  289-290;  fixed  charges 
in  reorganizations  of,  290;  treatment  of 
bondholders  in  reorganizations  of,  290; 
table  showing  sacrifices  made  by  bond- 
holders in  certain  reorganizations  of, 
291;  summary  of  reorganizations  of,  292. 

Interborough  Rapid  Transit  Company 
agreement,  207;  made  effective  only 
through  public-service  commission,  207. 

Interest  on  foreign  capital,  68,  69,  70,  90. 

Interstate  Commerce  Commission :  estab- 
lishment of,  168;  increase  in  powers  of, 
168-169;  unable  to  handle  problem  of 
railway  regulation,  178;  federal  valua- 
tion of  all  railroads  under  auspices  of, 
181;  comparison  of  Federal  Trade  Com- 
mission with  the,  276-277. 

Investment:  in  bonds  a  modem  develop- 
ment, ix;  of  funds  difficult,  i;  leading 
channels  of,  i ;  three  principal  kinds  of, 
i;  funds  should  be  invested  when  re- 
ceived, i;  framework  of  bond,  3;  muni- 
cipal bonds  among  safest  mediums  of, 
161;  selection  of  industrial  bonds  for, 
requires  great  care,  294. 

Investments:  colonial  and  foreign,  of 
Great  Britain,  65,  68-69,  7°)  88-89,  9°; 
of  France,  65,  70,  72,  88-89,  9°;  of  Ger- 
many, 70;  of  the  United  States,  70-71. 

Invisible  trade  balance,  68-71;  colonial 
and  foreign  investments  of  nations,  68- 


71;  interest,  tourist  expenditures,  re- 
mittances to  friends,  freights,  69; 
American  securities  held  abroad,  69- 
70;  lending  countries,  70. 

Issue  of  securities :  conflict  of  authority  in 
approval  of,  by  railroads,  170;  federal 
supervision  of  the,  by  railroads,  179- 
180;  authority  of  commissions  to  ap)- 
prove  or  disapprove,  230-232;  in  New 
York  State,  230-231;  wisdom  of  com- 
mission control  of  the,  231-232;  pub- 
licity method  of  control  of  the,  232. 

Italy:  price  of  Italian  bonds,  19 13,  7; 
racial  origin  of,  9;  outline  of  history  of, 
12-13;  population,  wealth,  and  debt  of, 
15-17;  assets  offsetting  national  debt 
of,  18;  national  debt  charge  of,  20;  na- 
tional debt  charge  compared  with  total 
government  expenditure,  2 1 ;  growth  in 
population  of,  22,  23;  growth  in  wealth 
of,  24,  25;  increase  in  debt  of,  27,  29; 
debt  history  of,  51-52;  form  of  govern- 
ment in,  60-61;  military  position  of,  64; 
economic  position  of,  65;  foreign  com- 
merce of,  67,  68;  position  of,  among  na- 
tions, 73;  prices  of  Italian  rentes,  77; 
war  loans  put  out  by,  since  beginning  of 
present  war  up  to  October  23,  1915,  82, 
83;  war  prices  of  Italian  bonds,  91,  92; 
state-operated  railways  in,  176;  muni- 
cipal ownership  and  operation  of  public 
utilities  in,  236. 

Japan:  special  security  for  certain  bonds 
of,  5;  prices  of  Japanese  bonds,  19 13,  7; 
racial  origin  of,  9;  outline  of  history  of, 
14-15;  population,  wealth,  and  debt  of, 
15-17;  assets  offsetting  national  debt  of, 
18;  national  debt  charge  of,  20;  national 
debt  charge  compared  with  total  gov- 
ernment expenditure,  19,  21;  growth  in 
population  of,  23;  increase  in  debt  of, 
27,  29;  debt  history  of,  55-57;  form  of 
government  in,  62-63 ;  character  of  pop- 
ulation of,  63;  military  position  of,  64; 
economic  position  of,  65;  foreign  com- 
merce of,  67,  68;  position  of,  among  na- 
tions, 73;  prices  of  Japanese  bonds 
1903-1912,  77;  war  prices  of  Japanese 
bonds,  91;  state-operated  railways  in, 
176. 

Judicial  review,  of  public-service  com- 
mission decisions,  232-233. 


3i8 


INDEX 


Laws:  constitutional,  in  regard  to  state 
debts,  1 29-131;  Massachusetts,  in  re- 
gard to  creation  and  payment  of  local 
debt,  143-146;  comparison  of  Massa- 
chusetts, with  those  of  other  States  in 
regard  to  local  debt,  146-152;  Sherman 
Anti-Trust  Law,  262-267;  Clayton 
Anti-Trust  Law,  267-272;  Federal 
Trade  Commission  Law,  267-268,  272- 
282;  railroad,  305-307. 

Legal ty  of  issue:  of  state  bonds,  131;  of 
municipal  bonds,  157-158. 

Length  of  time  to  run :  of  state  bonds,  131; 
of  county,  municipal,  and  district  bonds, 
150-151. 

Liberia,  government  loans  in  default,  59. 

Literacy:  of  nations,  63;  by  States,  135- 
136. 

Loaning  credit:  of  States,  131;  of  counties, 
municipalities,  and  districts,  149-150. 

Local  debt:  early,  in  France  and  the 
United  States,  x;  proportions  between 
county,  city  and  school  district,  159;  in 
1913, 159;  proportions  between  national, 
state  and,  159. 

Los  Angeles,  local  regulation  of  public- 
service  corporations  in,  233. 

Louisiana,  debt  history  of,  125-127. 

Market  for  bonds,  3. 

Maryland,  debt  history  of,  103-104. 

Massachusetts:  debt  record  of,  128;  stat- 
utory provisions  in  regard  to  local  debt 
in,  143-146;  comparison  of  Massachu- 
setts laws  with  those  of  other  States  in 
regard  to  creation  of  local  debt,  146- 
152;  limiting  debt  and  removing  tax 
limit  in,  148;  purposes  for  which  county, 
municipal,  and  district  bonds  are  issued 
in,  144-146,  148-149;  length  of  time 
which  municipal  bonds  may  run  in,  144- 
146,  150;  method  of  paying  local  debt 
in,  151;  street-railway,  gas  and  electric- 
light  franchises  in,  205;  early  state  com- 
missions in,  208;  municipal  ownership 
and  operation  in,  234. 

Memphis,  Tennessee,  defaults  by,  155, 
156,  297-298,  302. 

Metropolitan  Street  Railway  Company, 
New  York,  reorganization  of,  246-248. 

Mexico :  special  security  for  certain  bonds, 
6;  government  loans  in  default,  58,  59. 

Michigan,  debt  history  of,  106-107. 


Michigan  Telephone  Company,  reorgani- 
zation of,  241-242,  246,  248. 

Middlesboro,  Kentucky,  default  by,  154, 
300,  302. 

Military  position  of  nations,  64. 

Minnesota,  debt  history  of,  iio-iii;  de- 
cisions in,  rate  cases,  170-172. 

Mismanagement  of  local  finances,  157. 

Mississippi,  debt  history  of,  108-iog. 

Missouri,  debt  history  of,  127-128. 

Monopoly:  recognition  of,  in  cases  of  pub- 
lic-service corporations,  202,  203-204, 
209. 

Monopoly  control:  combination  and,  261; 
competition  and,  267;  capitalization  of, 
267,  285,  287,  288;  machinery  for  pre- 
venting, 282-283;  certain  experiences 
in,  284-285. 

Mortgage:  real-estate,  2;  first,  bonds,  162, 
163;  consolidated,  bonds,  162;  general, 
bonds,  162. 

Municipal  bonds:  definition  of,  140; 
means  of  recovery  on  defaulted,  140; 
certain  factors  governing  safety  of,i4a- 
141,  152-153,  157;  laws  in  regard  to  is- 
sue of,  in  Massachusetts,  143-146;  com- 
parison of  Massachusetts  laws  with 
those  of  other  States  in  regard  to  issue 
of,  146-152;  purposes  of  issue  of,  144- 
146,  148-149;  issue  of,  for  improper  or 
unwise  purposes,  149-150;  length  of 
time  which  bonds  may  run,  144-146, 
150-15 1 ;  vote  of  people  to  authorize, 
151;  payment  of,  by  sinking  fund  or 
serial  method,  151;  amount  and  char- 
acter of  population  important  factors 
in  safety  of,  152-153;  leading  munici- 
pal securities  in  the  United  States, 
153;  record  of,  153-157;  causes  of 
default  in,  154-155,  297-303;  cases  of 
bad  faith  with,  155;  settlements  made 
with  bondholders  on  defaulted,  155- 
156,  297-303;  mismanagement  of  local 
finances,  157;  commission  form  of  gov- 
ernment, 157;  legality  of  issue  and  certi- 
fication as  to  genuineness,  157-158;  in- 
crease in  issue  of,  158-159;  increasing 
issue  of,  to  acquire  public  utilities,  159; 
prices  of,  1902-1912,  160;  war  prices 
of,  160-161;  safety  of,  161. 

Municipal  ownership  and  operation :  possi- 
ble municipal  purchase  of  public  utili- 
ties, 159,  214-215,  234;  in  Massachu- 


INDEX 


319 


setts,  234;  m  other  States,  234-235;  in 
Europe,  235-236;  wisdom  of,  in  the 
United  States,  236. 

National  mcome:  compared  with  debt 
charge,  19,  20;  growth  m,  of  leading 
nations,  26. 

Nations:  no  legal  remedy  against  default- 
ing, 6;  can  borrow  for  any  purpose,  6; 
racial  origin  of  the  leading  modem,  9; 
changes  in  leadership  among,  g-io; 
growth  in  population  of,  20-23;  growth 
in  wealth  of,  23-26;  growth  in  income  of, 
26;  growth  in  debts  of,  26-29;  forms  of 
government  of  various,  58,  60-63;  char- 
acter of  population  of,  63 ;  mihtary  posi- 
tion of,  64;  economic  position  of,  64-65; 
trade  position  of,  66;  foreign  commerce 
of,  66-68;  mvisible  trade  balance,  68- 
71;  lending,  70;  situation  of  the  leading, 
71-73;  reduced  expenditures  necessary 
for  national  solvency,  85-86;  status  of, 
after  the  war,  86-87. 

Net  earnings:  of  railroads,  169-170,  240; 
of  pubhc-ser\dce  corporations,  240;  and 
receiverships  of  railroads,  gas  and  elec- 
tric companies  and  industrials,  240;  of 
industrial  concerns,  240;  in  1903  and 
1904,  253;  1907  and  1908,  254;  1913  and 
1914,  255;  of  industrial  concerns  for 
three  periods,  308-309. 

New  Hampshire,  statement  by  Public- 
Service  Commission,  of  proper  treat- 
ment of  depreciation  m  estimatmg 
value  as  a  basis  for  rates,  225-226. 

New  York  State:  debt  record  of,  128; 
favorable  factors  affecting  credit  of, 
136-137;  basis  on  which  pubUc-ser- 
vice  consoUdations  are  permitted  in, 
214;  regulation  of  issue  of  securities 
of  pubUc-service  corporations  in,  230- 
231. 

North  Carolma,  debt  history  of,  118- 
119. 

Northern  Pacific  Railroad  Company: 
causes  of  failure  of,  167;  summary  of 
reorganization  of,  187;  what  security- 
holders received  in  reorganization  of, 
190;  relation  between  foreclosure  price 
and  debt  of,  187,  192;  market  value  of 
new  securities  received  in  reorganiza- 
tion of,  193. 

Notes,  short  term,  163. 


Ohio,  debt  record  of,  128. 
Operation:  possible  government,  of  rail- 
roads in  the  United  States,  i73~i7S;  re- 
sults of  state,  of  railways  in  Europe, 
175-176;  municipal,  of  public-service 
corporations  in  Massachusetts,  234; 
mimicipal  ownership  and,  of  public- 
service  corporations  elsewhere  in  the 
United  States,  234-235;  municipal 
ownership  and,  of  public-service  cor- 
porations in  Europe,  235-236;  munici- 
pal, of  public  utilities  and  govern- 
ment, of  railroads,  236;  possible  ad- 
vantages and  disadvantages  of  large- 
scale,  of  industrial  concerns,  259-261; 
successful  and  unsuccessful  large-scale, 
of  industrial  concerns,  261;  certain  ex- 
periences in  large-scale,  284-285. 
Original  cost  method  in  estimating  value 

as  a  basis  for  rates,  220. 
Overhead  charges,  allowance  for,  in  esti- 
mating value  as  a  basis  for  rates,  226- 
227. 
Ownership:  government,  of  railroads,  173- 
17s;  two  forms  of  government,  of  rail- 
roads, 173;  extent  of  government,  of 
railroads,  174;  arguments  in  favor  of 
government,  of  railroads,  174-175;  ar- 
guments against  government,  175;  re- 
sults of  state  operation  in  Europe,  175- 
176;  regulation  vs.  government,  177; 
municipal,  of  pubUc-service  corpora- 
tions in  Massachusetts,  234;  municipal, 
of  pubhc-service  corporations  elsewhere 
in  the  United  States,  234-235;  munici- 
pal, of  public-service  corporations  in 
Europe,  235-236;  municipal,  of  public 
utihties  more  feasible  but  less  necessary 
than  govermnent  ownership  of  railroads, 
236;  government,  of  telephone  lines, 
237-238;  government,  of  water-power 
developments,  238. 

Paraguay,  government  loans  in  default, 

59- 
Peace,  possible  basis  of,  84-85. 
Pennsylvania,  debt  history  of,  103. 
Peru,  government  loans  in  default,  59. 
Pittsburg,  Pennsylvania,  defaults  by,  154, 

156,  298-299,  302. 
"Plain"  bonds,  162. 
Population:    of    leading   nations,   15-16; 

growth  in,  of  leading  nations,  20-23; 


320 


INDEX 


character  of,  important  in  estimating 
national  credit,  63 ;  amount  and  increase 
of,  by  States,  1900-1910,  132,  133; 
color  of,  by  States,  1900-1910, 132, 134; 
literacy  of,  in  the  United  States,  135, 
136;  an  important  consideration  in 
safety  of  local  debt,  152-153;  amount 
and  character  of,  important  factors  in 
estimating  safety  of  public-service  cor- 
poration bonds,  202-203. 
Prices:  of  government  bonds,  7,  74-76,  77, 
91-93;  of  state  bonds,  137-139;  of  muni- 
cipal bonds,  160-161;  of  railroad  bonds, 
196;  of  public-service  corporation 
bonds,  198-199, 250;  of  industrial  bonds, 

293-294- 

Promotions:  corporate,  and  reorganiza- 
tions, 284;  purposes  of  industrial,  and 
consolidations,  284. 

Public:  relation  of  railroads  to  the,  169- 
170;  relation  of  public-service  corpora- 
tions to  the,  204,  238-239;  relation  of 
telephone  companies  to  the,  237-238; 
relation  of  water-power  developments 
to  the,  238;  relation  of  industrial  con- 
cerns to  the,  258;  corporations  subject 
to  control  of  the,  262. 

Public  properties:  value  of  state,  98;  value 
of  local,  158. 

Public-service  commissions:  regulation  of 
railroads  by  State,  169;  establishment 
of  early,  208;  establishment  of  modern, 
208;  present,  having  jurisdiction  over 
street  railway,  gas,  electric  light  and 
power  and  telephone  companies,  210- 
212. 

Public-service  corporations:  issue  of  mimi- 
cipal  bonds  to  acquire  public  utilities, 
149,  159;  origin  and  development  of 
business  done  by,  199-202;  points  of 
similarity  in  different  classes  of,  202; 
monopolistic  character  of,  203-204; 
franchises  of,  204-207;  regulation  by 
state  commissions  of,  207-208;  present 
state  commissions  having  jurisdiction 
over,  209,  210-212;  leading  principles  of 
state  regulation  of,  209,  213-232;  recog- 
nition of  monopoly  principle,  209;  cer- 
tificates of  public  convenience  and  ne- 
cessity, 209,  212-213;  consolidations  of, 
213-214;  possible  municipal  purchase 
of,  214-215;  valuation  of,  as  a  basis  for 
rates,  220-230;  state  vs.  local  regulation 


of,  233;  Uniform  Utilities  Bill,  233; 
municipal  ownership  of,  234-236;  broad 
relation  of,  to  the  people,  238-239; 
stability  of  gross  earnings  of,  239;  net 
earnings  and  receiverships  of,  240;  re- 
ceiverships and  reorganizations  of,  240- 
248;  summary  of  situation  of,  248;  finan- 
cial plan  of,  should  be  broad,  flexible, 
and  firm,  249-250. 

Public-service  corporation  bonds:  princi- 
pal classes  of,  198;  prices  of  some  lead- 
ing, 198-199;  size  and  character  of  com- 
munity served  an  important  factor  in 
safety  of,  202-203;  ratio  of  debt  to  as- 
sets of,  203;  how  regulation  by  state 
commissions  affects  safety  of,  208;  ex- 
amples of  strong,  248-249;  prices  of, 
250;  war  prices  of,  250;  final  test  of,  250. 

Purpose  of  issue:  of  government  bonds,  6; 
of  state  bonds,  94,  1 29-131;  should  be 
of  a  strictly  public  character,  129,  148- 
149;  of  county,  municipal,  and  district 
bonds,  144-149;  unwise  or  improper 
purposes,  149-150. 

Quasi-mimicipal  corporations,  142. 

Racial  origin  of  leading  modem  nations,  9. 

Railroad  bonds:  definition  of,  162;  various 
kinds  of,  162;  payable  from  property  or 
earnings,  163;  certain  factors  governing 
safety  of,  163,  195;  remedies  for  non- 
payment of,  163;  a  popular  medium  of 
investment,  164;  conditions  to  be  con- 
sidered before  investing  in,  164-165;  de- 
faults on,  165;  examples  of  strong,  195- 
196;  prices  of,  196;  war  prices  of,  196. 

Railroads:  beginning  and  growth  of ,  164; 
growth  in  mileage  of,  164, 166;  competi- 
tion of,  165,  256;  gross  income  of,  165, 
239;  subject  to  conflicting  regulation, 
165;  cost  of  financing  and  operating, 
165;  receiverships  and  reorganizations 
of,  165-166;  leading  causes  of  railroad 
troubles,  166;  difficulties  of,  since  1893- 
98,  166,  168;  failures  of  various,  166, 
167;  summary  of  causes  of  railroad 
troubles,  168;  establishment  of  Inter- 
state Commerce  Commission,  168;  in- 
crease in  powers  of  the  commission, 
168-169;  regulation  of,  by  state  legisla- 
tures and  public-service  commissions, 
168-169;   relation   of,  to   the   public, 


INDEX 


321 


169-170;  arbitration  of  wages  on,  170; 
regulation  by  States  of  issues  of  securi- 
ties, 170;  possible  exclusive  control  of, 
by  Federal  Government,  170;  Minne- 
sota rate  cases,  170-172;  Shreveport 
rate  cases,  172;  comparison  of  Minne- 
sota and  Shreveport  cases,  172;  federal 
licensing  or  incorporation  of  interstate, 
172-173;  government  ownership  of,  1 73- 
175;  government  ownership  and  opera- 
tion of,  in  Europe,  17-18,  175-176; 
regulation  of,  177-180;  regulation  of,  in 
Great  Britain  and  Ireland,  177;  regula- 
tion of,  in  France,  177-178;  regulation 
of,  in  Europe,  178;  outline  for  exclusive 
federal  regulation  of  all,  in  the  United 
States,  178-180;  supervision  of  securi- 
ties of,  179-180,  232;  regulation  of, rates, 
1 79-18 1 ;  rates  should  be  reasonable  and 
compensatory,  180;  bases  of  rate-mak- 
ing,^i8o;  limits  of  high  and  low  railroad 
rates  and  ideal  rate,  180-181;  federal 
valuation  of,  181-183;  valuations  of, 
made  by  certain  States,  183,  184;  possi- 
ble result  of  federal  valuation  of,  183; 
suggested  railroad  reforms,  183,  185; 
objects  of  proper  regulation  of,  185;  two 
periods  of  reorganizations  of,  185-186; 
reorganization  of  Atchison,  Topeka  & 
Santa  Fe  Railroad  Company,  187,  18S, 
193;  Union  Pacific  Railway  Company, 
187,  189,  193;  Northern  Pacific  Rail- 
road Company,  187,  190,  192,  193; 
Baltimore  &  Ohio  Railroad  Company, 
187,  191,  193;  relation  between  fore- 
closure price  and  value  of  property,  187, 
192;  rights  of  minority  bondholders 
in  foreclosure,  192;  capitalization  of 
American  and  European,  compared, 
194;  passenger  rates  of  American  and 
European,  compared,  194-195;  freight 
rates  of  American  and  European,  com- 
pared, 194-195;  comparison  of  efficiency 
of  American  and  European,  194-195; 
magnitude  of  railroad  industry,  196- 
197;  gross  and  net  capitalization  of  all, 
197;  importance  of  service  performed 
by  American,  197;  should  be  subject 
to  federal  regulation,  197;  laws,  305- 
307- 

Railways,  origin  and  development  of 
street  and  electric,  199-200. 

Rate-making:  bases  of  railroad,  in  the 


United  States,  180;  principles  of,  for 
public-service  corporations,  218. 

Rates :  regulation  of  railroad,  179-181;  rail- 
road, should  be  reasonable  and  compen- 
satory, 180;  bases  of  railroad  rate-mak- 
ing, 180;  limits  of  high  and  low  railroad, 
and  ideal  rate,  1 80-181;  comparison  of 
American  and  European  passenger,  194- 
195;  comparison  of  American  and  Eu- 
ropean freight,  194-195;  railroads  are 
entitled  to  fair,  197;  regulation  of  pub- 
lic-service corporation,  by  state  commis- 
sions, 215;  interrelationship  of  service 
and,  of  public-service  corporations,  217; 
authority  of  commissions  over,  of  pub- 
lic-service corporations,  218;  bases  of, 
for  public-service  corporations,  218- 
219;  fair  return  on  fair  value  of  prop- 
erty, 219;  rate  of  return  for  public-ser- 
vice corporations,  219;  variable  rate  of 
return,  219;  valuation  of  pubUc-service 
corporations  as  a  basis  for,  220-230; 
summary  of  valuation  as  a  basis  for, 
229-230. 

Real  estate:  advantages  and  disadvan- 
tages of,  as  an  investment,  2;  mort- 
gages, 2. 

Receiverships:  railroad,  165-168,  240; 
public-service,  240;  industrial,  240;  net 
earnings  and,  of  railroads,  gas  and  elec- 
tric companies  and  industrials,  240. 

Reforms,  suggested  railroad,  183,  185. 

Refunding  bonds,  150. 

Regulation:  railroad,  by  Interstate  Com- 
merce Commission,  168-169;  railroad, 
by  state  legislatures  and  public-service 
commissions,  169;  state,  of  issues  of  new 
railroad  securities,  170;  of  American  rail- 
roads by  Federal  Government  alone, 
170;  government  ownership  w. ,  1 7  7 ;  rail- 
way, in  Great  Britain  and  Ireland,  177; 
of  railways  in  France,  177-178;  of  rail- 
ways in  Europe,  178;  outline  for  exclu- 
sive federal,  of  all  interstate  railroads, 
178-180;  of  railroad  rates,  179-181 ;  rail- 
roads should  be  subject  to  federal,  197; 
of  public-service  corporations  by  state 
commissions,  207-208;  leading  princi- 
ples of  state,  of  public-service  corpora- 
tions, 209,  213-232;  principal  sources  of 
material  used  in  discussing  state,  of 
public-service  corporations,  209 ;  of  rates 
and  service  by  state  commissions,  215; 


322 


INDEX 


of  service,  215-217;  of  rates,  218-230; 
fair  return  on  fair  value  of  property, 
219;  rate  of  return,  219;  fair  value  of 
property,  220;  of  capitalization  of  pub- 
lic-service corporations  by  state  com- 
missions, 230-232;  supervision  of  ac- 
counts and  ordering  of  reports  of  public- 
service  corporations,  232;  state z'i.  local, 
of  public-service  corporations,  233;  of 
telephone  lines  by  Federal  Government, 
237-238;  of  water-power  companies, 
238. 

Reorganizations:  railroad,  185-194;  two 
periods  of  railroad,  185-186;  general 
summary  of  two  periods  of  railroad,  186; 
assessments  in  railroad,  186,  188-191; 
earlier  railroad,  less  effective  than  later, 
186;  Atchison,  Topeka  &  Santa  Fe  Rail- 
road, 187,  188,  IQ3;  Union  Pacific  Rail- 
way, 187,  189,  193;  Northern  Pacific 
Railroad,  187,  190,  192,  193;  Baltimore 
&  Ohio  Railroad,  187,  191,  193;  factors 
determining  apportionment  of  new  se- 
curities in  railroad,  192;  market  value  of 
securities  received  in  certain  railroad, 
192-194;  public-service,  240-248;  Mich- 
igan Telephone  Company,  241-242,  246, 
248;  Chicago  Union  Traction  Company, 
241,  243,  244,  246,  248;  Hudson  River 
Electric  Power  Company,  243,  245,  246, 
248;  Metropolitan  Street-Railway  Com- 
pany, 246-248;  summary  of  four  public- 
servace,  246,  248;  corporate  promotions 
and,  284;  industrial,  289-292;  aim  of  in- 
dustrial, 289;  total  capitalization  in  rail- 
road, 289-290;  total  capitalization  in 
Industrial,  289-290;  fixed  charges  in  in- 
dustrial, 290;  treatment  of  bondholders 
in  industrial,  290;  sacrifices  made  by 
bondholders  in  certain  industrial,  290- 
292;  summary  of  industrial,  292. 

Replacement,  cost  of,  theory,  220. 

Reports:  ordering  of,  of  public-service  cor- 
porations by  state  commissions,  232; 
may  be  asked  by  Federal  Trade  Com- 
mission, 274,  277. 

Reproduction  new,  cost  of,  theory,  220. 

Repudiation,  attitude  of  the  people  to- 
ward, 128-129,  156. 

Russia:  prices  of  Russian  bonds,  1913,  7; 
racial  origin  of,  9;  outline  of  history  of, 
13-14;  population,  wealth,  and  debt  of, 
15-17;  assets  offsetting  national  debt  of, 


18;  national  debt  charge  compared  with 
national  income,  20;  national  debt 
charge  compared  with  total  government 
expenditure,  21;  growth  in  population 
of,  22,  23;  growth  in  wealth  of,  25;  in- 
crease in  debt  of,  27,  29;  debt  history 
of,  49-51;  form  of  government  in,  62; 
character  of  population  of ,  63;  military 
position  of,  64;  economic  position  of, 
65;  foreign  commerce  of,  67,  68;  posi- 
tion of,  among  nations,  73;  prices  of 
Russian  bonds,  1873-1912,  77;  cost  of 
present  war  to,  76,  78;  total  losses  of 
present  war  up  to  July  31,  1915,  79; 
war  loans  put  out  since  beginning  of 
present  war  up  to  October  23,  1915, 
82,  83;  war  prices  of  Russian  govern- 
ment bonds,  91,  92. 

St.  Clair  County,  Missouri,  default  by, 
154,  156,  299,  302. 

Santo  Domingo,  government  loans  in  de- 
fault, 59. 

Securities:  American,  held  abroad,  69-70, 
90;  of  colonial  and  foreign  countries 
held  by  Great  Britain,  65,  68-69,  7o> 
88-89,  90;  foreign  and  colonial,  held  by 
France,  65,  70,  72,  88,  89^,  90;  foreign 
and  colonial,  held  by  Germany,  70; 
foreign,  held  in  the  United  States,  70- 
71;  supervision  of  railroad,  179-180; 
approval  of  public-service,  230-232; 
wisdom  of  commission  control  of  the 
issue  of  public-service,  231-232;  pub- 
licity method  of  control  of  issue  of,  232. 

Service:  regulation  of,  by  state  commis- 
sions, 215;  three  leading  elements  of, 
215;  safety  of,  215-216;  extent  of,  216; 
joint  use  of  facihties  by  public-service 
corporations,  216;  character  of,  216- 
217;  other  principles  in  regulation  of, 
217;  regulation  of,  should  be  efikient 
and  flexible,  217;  interrelationship  of, 
and  rates,  217;  cost  of,  as  a  basis  for 
rates,  218-219. 

Sherman  Anti-Trust  Law:  enactment  of, 
262-263;  leading  provisions  of  the,  263; 
enforcement  of  the,  263;  early  interpre- 
tation by  the  United  States  Supreme 
Court  of  the,  264-265;  early  interpreta- 
tion a  departure  from  common  law, 
264-265;  later  interpretation  by  the 
Supreme  Court  of  the,  in  the  Standard 


INDEX 


323 


Oil  and  American  Tobacco  cases,  265- 
267;  grounds  of  decisions  in  Standard 
Oil  and  Tobacco  cases,  265-266;  evi- 
dence on  which  decisions  were  based, 
266;  decisions  in  Standard  Oil  and  To- 
bacco  cases   brought    to   a    workable 

•  basis,  266-267;  in  regard  to  exports, 
270. 

Short-term  notes,  163. 

Short-term  paper,  i. 

Shreveport  rate  cases,  decisions  in,  172. 

Sinking  funds:  national,  of  France,  31,  32; 
national,  of  Great  Britain,  34,  35,  37, 
38;  national,  of  the  United  States,  44, 
46;  of  Russia,  so;  of  Germany,  55;  of 
Japan,  56;  municipal,  151;  industrial, 
258. 

South  Carolina,  debt  history  of,  119-121. 

Special  assessment  bonds,  140. 

State  bonds:  description  of,  94;  purpose  of 
issue  of,  94,  1 29-131;  collection  of  de- 
faulted, 04;  factors  determining  safety 
of,  94-95,  137;  certification  of,  131; 
vote  of  people  to  authorize,  131;  length 
of  time  to  run,  131;  examples  of  general 
considerations  governing  safety  of,  136- 
137;  prices  of,  1872-1912,  137-138;  war 
prices  of,  138-139;  most  important  fac- 
tor determining  safety  of,  139. 

States:  early  borrowing  by  our,  x;  debt 
statements  of  various,  95-9?;  percent- 
age of  net  debt  to  assessed  valuation  for 
all,  98,  99;  changes  in  total  debts  of  all, 
q8-ioo,  ioi  ;  debt  histories  of  all  default- 
ing, 100-128;  constitutional  restrictions 
On  debt  making  of,  1 29-131;  amount 
and  increase  of  population  by,  132-133; 
population  by  color  by,  132,  134;  liter- 
acy by,  135-136;  regulation  by,  of  is- 
sues of  new  railroad  securities,  170. 

Statutory  limitations  in  regard  to  creation 
and  payment  of  local  debt,  143-152. 

Stocks:  as  a  channel  of  investment,  i;  na- 
ture of,  2;  classes  of,  2. 

Supreme  Court  of  the  United  States:  on 
valuation  as  a  basis  for  rates,  221-222, 
223,  224,  226;  on  valuing  land,  223;  on 
pavement  over  mains,  224;  on  deprecia- 
tion, 226;  interpretation  of  the  Sherman 
Anti-Trust  Law  by  the,  264-267,  272; 
appeal  to  the,  in  enforcement  of  Clayton 
Act,  272;  in  enforcement  of  Federal 
Trade  Conmiission  Act,  273. 


Tax  limits,  148. 

Telephone:  origin  and  development  of  the, 
industry,  201-202;  relation  of,  com- 
panies to  the  public,  237-238;  report  of 
Postmaster-General  of  the  United 
States  on  telegraph  and  telephone  lines, 
237;  ownership  or  regulation  by  Federal 
Government  of,  lines,  237-238. 

Tennessee,  debt  history  of,  124-125. 

Terminal  bonds,  163. 

Texas,  debt  history  of,  111-112;  favorable 
factors  affecting  credit  of,  137. 

Tourist  expenditures,  68,  69,  70,  88. 

Trade  position  of  nations,  66-71. 

Trust  legislation:  Sherman  Anti-Trust 
Law,  262-267;  Clayton  Anti-Trust  Law, 
267-272;  Federal  Trade  Commission 
Law,  267-268,  272-282;  existing  anti-, 
283. 

"Trust  question":  origin  and  develop- 
ment of  the,  258-259;  true  solution  of, 
282. 

Turkey,  government  loans  in  default,  59. 

Uniform  Utilities  Bill,  233. 

Union  Pacific  Railway  Company:  cause  of 
failure  of,  167;  relation  between  fore- 
closure price  and  debt,  187 ;  summary  of 
reorganization  of,  187;  what  security- 
holders received  in  reorganization  of, 
189;  market  value  of  new  securities  re- 
ceived in  reorganization  of,  193. 

United  States:  early  government  borrow- 
ing in  the,  x;  early  state  and  local  loans 
in  the,  x;  development  of  the  bond  busi- 
ness in  the,  x;  government  bonds  of 
the,  5;  prices  of  bonds  of  the,  1913,  7; 
racial  origin  of  the,  9;  development  of 
the,  10;  population,  wealth,  and  debt  of 
the,  15-17;  assets  offsetting  national 
debt  of  the,  17;  national  debt  charge 
compared  with  national  income,  19,  20; 
national  debt  charge  compared  with 
total  government  expenditure,  19,  21; 
growth  in  population  of  the,  22,  23; 
growth  in  wealth  of  the,  24,  25,  26;  in- 
crease in  national  income  of  the,  26;  in- 
crease in  debt  of  the,  27,  29;  debt  history 
of  the,  41-49 ;  form  of  government  in  the, 
58,  60;  character  of  population  of  the, 
63;  military  position  of  the,  64;  eco- 
nomic position  of  the,  65 ;  domestic  com- 
merce of  the,  66;  foreign  commerce  of 


324 


INDEX 


the,  67,  68;  payments  by  the,  to  settle 
foreign  trade,  69;  American  securities 
held  abroad,  69-70,  90;  foreign  invest- 
ments of  the,  70-71;  position  of  the, 
among  nations,  71;  prices  of  bonds,  76, 
77;  war  prices  of  bonds,  93. 
Uruguay,  government  loans  in  default, 
59- 

Valuation:  assessed,  for  all  States,  191 2- 
1913,  98,  99;  relation  between  true 
value  of  property  and  assessed,  98;  as- 
sessed, of  counties  and  incorporated 
places,  141;  assessed,  and  net  debt  of 
local  communities,  141;  federal,  of  rail- 
roads, 181-183;  factors  to  be  considered 
in  federal,  of  railways,  181;  not  conclu- 
sive in  making  rates,  182;  benefits  to 
be  derived  from,  of  railroads  according 
to  Mr.  Prouty,  182;  summary  of  rail- 
way, 182-183;  railroad,  made  by  certain 
States,  183,  184;  possible  result  of  fed- 
eral, 183;  of  public-service  corporations 
as  a  basis  for  rates,  220-230;  leading 
theories  of,  as  a  basis  for  rates,  220; 
original  cost  theory,  220;  cost  of  repro- 
duction theory,  220;  cost  of  replace- 
ment theory,  220;  best  modem  practice 
favors  considering  all  elements  in  de- 
termining fair  value  as  a  basis  for  rates, 
221-222;  United  States  Supreme  Court 
on,  as  a  basis  for  rates,  221-222; 
methods  of  treatment  of  certain  de- 
tails of,  222-223;  land,  223;  United 
States  Supreme  Court  on  valuing  land, 
223;  present  vs.  unit  prices,  223-224; 
pavement  over  mains,  224;  United 
States  Supreme  Court  on  pavement 
over  mains,  224;  treatment  of  deprecia- 
tion, 224-226;  United  States  Supreme 
Court  on  depreciation,  226;  overhead 
charges,  226-227;  development  expense 


or  going  concern  value,  227-228;  good- 
will, 227;  franchise  value,  228-229;  sum- 
mary of,  as  a  basis  for  rates,  229-230. 

Value:  fair,  of  property,  219,  220;  allow- 
ance for  overhead  charges  in  estimating, 
226-227;  going  concern,  or  develop- 
ment expense,  227-228;  franchise,  228- 
229. 

Venezuela,  government  loans  in  default, 
59- 

Virginia,  debt  history  of,  114-117. 

Vote  of  people:  to  authorize  state  bonds, 
131;  to  authorize  county,  municipal, 
and  district  bonds,  151. 

Voting  trusts,  192. 

War:  estimated  direct  cost  of  present  war, 
76-77,  78-79,  80-81;  comparison  with 
cost  of  previous  wars,  80;  total  losses  of 
present,  to  date,  79-80,  81;  loans,  81- 
84;  possible  basis  of  peace,  84-85;  ne- 
cessity of  reduced  expenditures,  85-86; 
status  of  nations  after  the,  86-87. 

War  prices:  of  government  bonds,  91-93; 
state  bonds,  138-139;  municipal  bonds, 
160-161;  railroad  bonds,  196;  public- 
service  corporation  bonds,  250;  indus- 
trial bonds,  294. 

Water  companies,  198. 

Water-power  developments,  relation  of,  to 
the  pubHc,  238. 

Wealth:  estimated, of  leading  nations,  15- 
17;  growth  in, of  leading  nations,  23-26. 

West  Virginia,  debt  history  of,  11 7-1 18. 

Wisconsin:  franchises  in,  205;  basis  on 
which  public-service  consolidations  are 
permitted  in,  214;  regulation  of  service 
by.  Commission,  215;  Commission  on 
determining  fair  value  as  a  basis  for 
rates,  221;  amount  allowed  by,  Commis- 
sion for  overhead  charges  in  estimating 
fair  value,  227. 


CAMBRIDGE  .  MASSACHUSETTS 
U    .    S    .   A 


UNIVERSITY  OF  CALIFORNIA,  LOS  ANGELES 

THE  UNIVERSITY  LIBRARY 

This  book  is  DUE  on  the  last  date  stamped  below 


m  -  z 


1  7  1951 
OCT  3  0<^^ 
JE«URI    J^" 


Form  L-0 

25  m -2, '43  (5205) 


OKIVERSITY  OF  GALIFOKNl> 

AT 

LOS  ANGELES 

LIBRARY 


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AA    000  977  852 


